What Is a Managed Account?

A managed account is an investment account that is owned by a single investor, either by an institutional investor or an individual or retail investor. A professional money manager, hired by the investor oversees the account. 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.

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 (AUM).
  • 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.

How a Managed Account Works

A managed account may contain financial assets, cash, or titles to property. The money or investment manager has the authority to buy and sell assets without the client’s prior approval, as long as they act 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 will typically supply the client with regular reports on the account's performance and holdings.

Money managers often have minimum dollar amounts on the accounts they will manage. That is, a client must have 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.

To compensate the manager for his efforts, they will usually charge an annual fee, calculated as a percentage of the assets under management (AUM). Compensation fees range greatly, but most average around 1% to 2% of AUM. Many managers will provide discounts based on an account's asset size, so that the larger the portfolio, the smaller the percentage fee. These 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 invest over a variety of assets—or asset classes. Technically, a mutual fund is a type of managed account. The fund company will hire a money manager to look after investments in the fund's portfolio. This manager may alter the fund's holdings per the fund's objectives. When mutual funds began to be marketed in earnest in the 1950s, they were touted as a way for the "little guy"—i.e., small retail investor—to experience and benefit from professional money management. Previously, a service available only to high-net-worth individuals.

Pros

  • Customized managed accounts address the account holder's needs; mutual funds invest according to the fund's 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 own the fund's assets, only a share of the fund's asset value.

Cons

  • Managed accounts often require six-figure minimum in funds; mutual funds demand much lower initial investment amounts.

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

  • Compensation for managed account managers is by annual fees that can impact overall return; mutual funds' expense ratio fees tend to be lower.

Management Considerations

Both managed accounts and mutual funds have professional managers. Managed accounts are personalized investment portfolios customized to the specific risks, goals, and needs of the account holder. Management of the mutual fund is on behalf of the many mutual-fund holders and done to meet the fund's investment and return objectives.

With a managed account, the investor allocates funds, and the manager purchases and places physical shares of securities into the account portfolio. The account holder owns the securities and may direct the manager to 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 the fund.

Transactional Considerations

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, depending on the holdings selected, managers may be able to liquidate securities at specific times only. Conversely, shares of mutual funds may typically be purchased and redeemed as desired, daily. However, some mutual funds may carry penalties if redeemed before holding for a specified period.

The professional guiding a managed account may attempt to offset gains and losses by buying and selling assets when it is the most tax beneficial to the account's owner. In doing so, it could result in little or no tax liabilities on a significant profit for the individual. In contrast, mutual fund shareholders have no control when portfolio managers sell the underlying securities so that 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.

As reported by "FinAlternatives.com," the state-managed Alaska Permanent Fund Corp. in Juneau redeemed US$2 billion in hedge funds to invest in a managed account so that investment decisions would be in-house. Another example comes from the $28.2 billion Iowa Public Employees’ Retirement System who set up plans for moving $700 million in investments to managed accounts with seven firms in 2016, according to Pensions & Investments.