What is a Managed Account?

A managed account is an investment account that is owned by a single investor, either an institutional one or an individual (retail investor), and overseen by a professional money manager hired by the investor. Armed with discretionary authority over the account, this dedicated manager actively makes investment decisions pertinent to the individual, considering the client's needs and goals, risk tolerance, and asset size.

Managed accounts hold many benefits for the high net-worth investor.

How a Managed Account Works

A managed account may hold financial assets, cash, or titles to property. The money or investment manager may buy and sell assets without the client’s prior approval, as long as he or she acts according to the client’s objectives. Because a managed account involves fiduciary duty, the manager must act in the best interest of the client or potentially face civil or criminal penalties. The investment manager typically supplies the client with regular reports.

Money managers often have minimum account requirements—that is, a client must start out with a certain amount of funds to invest. Many minimums start at $250,000, though some managers will accept $100,000 and even $50,000 accounts.

In return for his efforts, a manager is compensated by an annual fee, a percentage of the assets under management (AUM). While they range greatly, most fees average about 1% to 2%. Many managers will provide discounts based on asset size: the larger the portfolio, the smaller the percentage fee. Fees may be tax-deductible, as investment expenses.

Managed Accounts Versus Mutual Funds

Managed accounts and mutual funds both represent actively managed portfolios or pools of money that are invested over a variety of assets (or asset classes). Technically, a mutual fund is a type of managed account: The fund company hires a money manager who looks after investments in the fund's portfolio and may alter the fund's holdings in accordance with its objectives. In fact, when they began to be marketed in earnest in the 1950s, mutual funds were touted as a way for the "little guy"—i.e., small retail investors—to experience and benefit from professional money management, a service previously available only to high-net-worth individuals.

Pros

  • Managed accounts are tailored to the account holder's personal needs; mutual funds are invested according to fund objectives.

  • Managed account trades can be timed to minimize tax liability; mutual fund investors have no control when a fund realizes taxable capital gains.

  • Managed account-holders have maximum transparency and control over assets; mutual fund-holders don't actually own the fund's assets, only a share of the fund's asset value.

Cons

  • Managed accounts often require six-figure minimums; mutual funds demand much lower initial investments.

  • It may take days to invest or de-vest managed account assets; mutual fund shares can be bought or sold daily.

  • Managed account managers are compensated by annual fees that can impact overall return; mutual funds' expense ratios tend to be lower.

However, managed accounts are personalized investment portfolios tailored to the specific needs of the account holder, whereas a mutual fund is professionally managed on behalf of many mutual-fund holders.

With a managed account, the investor puts in money, and the manager purchases and places physical shares of securities in the account. The account holder owns the securities and may have the manager trade them as desired. In contrast, mutual funds are classified by investors’ risk tolerance and the funds’ investment objectives, not by individual preferences. Also, investors purchasing shares of a mutual fund own a percentage of the value of the fund, not the fund itself or the actual assets in it.

On the transactional side, events might move more slowly in a managed account. Days may pass before the manager has the money fully invested; also, managers may be able to liquidate securities at specific times only. Conversely, shares of mutual funds may typically be purchased and redeemed as desired, on a daily basis.

The professional guiding a managed account may attempt to offset gains and losses by buying and selling assets when it is the most tax-efficient time to do so, resulting in little or no liability on a big profit. In contrast, mutual fund shareholders have no control when portfolio managers sell underlying securities, so they may face tax bites on capital gains.

Real World Example of a Managed Account

In July 2016, managed funds were in the news, as several institutional investors simultaneously opted for them over the hedge funds that had been handling a portion of their portfolios. The investors wanted broader platforms, customized strategies, full control over their separate accounts, daily valuation, significantly lower fees, and full transparency when it came to those fees, as well as to the nature of the holdings themselves.

The state-managed Alaska Permanent Fund Corp. in Juneau redeemed $2 billion in hedge funds to invest in a managed account so that investment choices would be made in-house. Likewise, the $28.2 billion Iowa Public Employees’ Retirement System in Des Moines began setting up plans for moving $700 million in investments to managed accounts with seven firms.

Key Takeaways

  • A managed account is an investment account owned by a single investor and overseen by a professional money manager hired by that investor.
  • Money managers often demand six-figure minimum investments to manage accounts and are compensated by a fee, a set percentage of assets under management.
  • A mutual fund is a type of managed account, but it is open to anyone with the means to buy its shares, rather than personalized for a particular investor.