What is a 'Managed Account'

A managed account is an investment account that is owned by an individual investor and overseen by a hired professional money manager. In contrast to mutual funds, which are professionally managed on behalf of many mutual-fund holders, managed accounts are personalized investment portfolios tailored to the specific needs of the account holder. With a mutual fund, 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.

BREAKING DOWN 'Managed Account'

A managed account may hold assets, cash or title to property for the benefit of the client. The manager may buy and sell assets without the client’s prior approval, as long as the manager 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.

Similarities and Differences Between Managed Accounts and Mutual Funds

Managed accounts and mutual funds help diversify an investor’s portfolio. Pools of money are invested over a variety of securities that are actively managed by professional managers.

However, 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 sell them as desired. In contrast, mutual funds are classified by investors’ risk tolerance and the funds’ investment objectives, not by individual preferences. For example, an investor with an aggressive growth profile may purchase volatile stocks, whereas a conservative investor may purchase safer investments. Also, investors purchasing shares of a mutual fund own a percentage of the value of the fund, not the fund itself.

With a managed account, days may pass before the manager has the money fully invested. Also, managers may liquidate securities at specific times only. Conversely, shares of mutual funds may typically be purchased and redeemed as desired.

When owning a managed account, the manager may attempt to offset gains and losses by buying and selling assets when it is the most tax-efficient time to do so. This may result in little or no tax liability. In contrast, mutual fund shareholders owe taxes on capital gains when portfolio managers sell underlying stocks for a profit. Therefore, shareholders have no control over when capital gains are realized.

Example of a Managed Account

In July 2016, the use of managed accounts was increasing as institutional investors withdrew from hedge funds due to disapproval of fees, returns and transparency. The investors wanted broader platforms, customized strategies, full control over their separate accounts, daily valuation, significantly lower fees and full transparency of portfolio holdings.

The 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 Iowa Public Employees’ Retirement System in Des Moines was setting up plans for moving investments to managed accounts with seven firms.

Benefits of Managed Accounts

Managed accounts hold many benefits for the high net-worth investor. Foremost, they offer a dedicated active manager making investment decisions pertinent to the individual, considering the client's goals, risk tolerance and asset size. Managed accounts are subject to minimum investment requirements and asset-based fees rather than varying per-transaction charges that typically accompany mutual funds. They also give the investor transparency into the decisions being made on their behalf, with regular reports typically provided. Further, many managers will provide discounts based on asset size, and fees may be tax deductible. 

    RELATED TERMS
    1. Managed Money

      Managed money is a means of investment whereby investors rely ...
    2. Funds Management

      The management of the cashflow of a financial institution. The ...
    3. Fund Manager

      Fund managers oversee portfolio of mutual or hedge funds and ...
    4. Money Manager

      A money manager is a person or financial firm that manages the ...
    5. Management Fee

      Management fees are the price charged by a fund manager to invest ...
    6. Discretionary Investment Management

      Discretionary investment management is a form of investment management ...
    Related Articles
    1. Investing

      Separately managed accounts: A mutual fund alternative

      It takes a hefty minimum investment to get in on an SMA, but these offer some distinct advantages.
    2. Investing

      The Difference Between Mutual Funds And Hedge Funds

      Both mutual funds and hedge funds are managed portfolios. A manager chooses securities and then lumps them into a single portfolio.
    3. Financial Advisor

      How to Rate Your Mutual Fund Manager

      What to really look for when you're deciding on a mutual fund.
    4. Investing

      How to sell mutual funds to your clients

      Learn about the top talking points to cover when discussing mutual funds with clients – and how explaining their benefits can help you close the sale.
    5. Investing

      Choose a Fund With a Winning Manager

      We break down key components of analyzing a fund manager's performance so you can find a winner.
    6. Investing

      What You Need to Know About Mutual Funds

      Mutual funds are a good investment opportunity, but investors should know how they operate.
    7. Financial Advisor

      Preparing for a Career as a Portfolio Manager

      Find out what it takes to win a spot in one of the most coveted financial careers, portfolio manager.
    8. Investing

      How to Choose Between Mutual Funds and ETFs

      Mutual funds and ETFs are both investment funds, but they are not as similar as you might think.
    9. Investing

      How to Pick a Good Mutual Fund

      Learn the basics of investing in mutual funds, including how to establish your goals and risk tolerance and choose the type of fund that's best suited to meet your needs.
    10. Investing

      Are Mutual Funds A Relic?

      We list some options other than mutual funds for your retirement plan.
    Hot Definitions
    1. Leverage

      Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
    2. Financial Risk

      Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
    3. Enterprise Value (EV)

      Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
    4. Relative Strength Index - RSI

      Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
    5. Dividend

      A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
    6. Inventory Turnover

      Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
    Trading Center