Understanding Managed Accounts for Investors

A managed account is a type of investment account where a professional manager makes investment decisions on behalf of the client.

This approach can be beneficial for investors who want to diversify their portfolios or don't have the time or expertise to manage their investments themselves.

A key feature of managed accounts is the ability to tailor investment strategies to individual clients' goals and risk tolerance.

An account is essentially a container that holds your investments. A managed account is a type of investment account that is owned by an individual or institution, but is managed by a professional money manager.

The account owner can be an institutional investor or an individual retail investor, and the manager has discretionary authority over the account. This means they can make investment decisions without needing to get approval from the client.

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A managed account is an investment account owned by an individual investor, typically within a family office, but managed by a professional money manager.

Customized investment strategies are a key feature of managed accounts. This allows for a personalized approach that aligns the investment portfolio with the unique needs and objectives of the family office.

Direct ownership of assets is another benefit of managed accounts. This means the family office has complete control over the assets, which can be a major advantage.

Enhanced transparency is a crucial aspect of managed accounts. This allows the family office to have a clear understanding of their investments and how they're performing.

Managed accounts also enable the implementation of tax-efficient strategies. This can help minimize tax liabilities and maximize returns.

The expertise of professional management is leveraged in managed accounts. This means the family office can tap into the knowledge and experience of professional money managers to make informed investment decisions.

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A managed account can contain a variety of assets, including financial assets, cash, and property titles. The investment manager has the authority to buy and sell these assets without the client's prior approval, as long as they act in the client's best interest.

Additional reading: Assets under Management

The investment manager is responsible for acting with fiduciary duty, which means they must prioritize the client's objectives above their own interests. Failure to do so can result in civil or criminal penalties.

Managed accounts often have minimum dollar amounts that must be met before the investment manager will accept the account. These minimums can vary, but some managers require as little as $50,000 or as much as $250,000.

Investment managers typically charge an annual fee for their services, which is calculated as a percentage of the assets under management. This fee can range from 1% to 2% of AUM, although some managers may offer discounts based on the size of the portfolio.

Robo-advisors are a more affordable option, charging around 0.25% of AUM, and may require as little as $5 to get started.

With a managed account, you can invest in a variety of options to grow your wealth.

One of the most popular options is a diversified portfolio, which can include stocks, bonds, and other securities. This type of investment can help spread out risk and increase potential returns.

A managed account can also invest in individual stocks, allowing you to pick specific companies you believe in.

In a managed account, you can also invest in bonds, which can provide a regular income stream and lower risk.

Some managed accounts also offer alternative investments, such as real estate or commodities, which can add diversification to your portfolio.

Investing in a managed account can also provide access to professional investment advice and guidance, helping you make informed decisions about your investments.

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Managed accounts can be a double-edged sword. They offer a high level of flexibility and control, but also come with their own set of challenges.

One of the main concerns is the potential for conflicts of interest. As we discussed earlier, managed accounts often involve multiple stakeholders with different priorities and goals. This can lead to disagreements and power struggles, which can ultimately harm the account's performance.

Another challenge is the need for ongoing monitoring and maintenance. Managed accounts require regular check-ins and adjustments to ensure they remain aligned with the client's objectives. This can be time-consuming and resource-intensive, especially for smaller accounts.

Despite these challenges, many investors find the benefits of managed accounts to be well worth the extra effort. By outsourcing the day-to-day management of their investments, they can free up time and energy to focus on other areas of their lives.

Days may pass before a managed account manager has the money fully invested, which can be a slower process compared to buying and selling shares of mutual funds daily.

Some mutual funds may carry penalties if redeemed before holding for a specified period, which can be a drawback for investors who need to access their funds quickly.

Investment managers of managed accounts may attempt to offset gains and losses to minimize tax liabilities for the account's owner, which can result in little or no tax liabilities on significant profits.

Mutual fund shareholders, on the other hand, have no control over when portfolio managers sell underlying securities, which can lead to tax bites on capital gains.

Managers of managed accounts typically charge an annual fee, calculated as a percentage of assets under management, which can range from 1% to 2% of AUM.

These fees are no longer tax-deductible as investment expenses, according to the Internal Revenue Service.

Robo-advisors, a digital platform providing automated portfolio management, can charge fees as low as 0.25% of AUM and require as little as $5 to get started.

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The Price Hurdle has been a significant obstacle for early managed account providers. Steve McCoy, the CEO of iJoin, notes that high fees resulted from service models that couldn't fully leverage technology and automation.

High fees were a major turnoff for sponsors, who were reluctant to default participants into advice programs that charged as much as 1% of assets. Tom Kmak, CEO of Fiduciary Decisions, agrees that pricing is an obstacle.

Managed accounts' fees have declined, with typical ranges now between 0.1% and 0.7% of assets. Pricing strategies can differ, with some providers charging one fee across all participant balances.

Some providers charge a per-participant rate based on each account's assets, while others charge a fixed-dollar minimum fee or a fixed per-participant fee.

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There are several types of managed accounts, each with its own unique characteristics.

A brokerage account is a type of managed account that allows investors to buy and sell securities, such as stocks, bonds, and mutual funds, in a tax-advantaged manner.

Investors can open a brokerage account with a financial institution, such as a bank or investment firm, and deposit funds to invest.

A custodial account, on the other hand, is a type of managed account that is held in the name of a minor or incapacitated individual, with an adult acting as the custodian.

Custodial accounts are often used to save for a child's education or to manage an elderly person's finances.

A trust account is a type of managed account that is created for the benefit of one or more individuals, with a trustee managing the assets on their behalf.

Trust accounts can be used to manage assets for minors, individuals with disabilities, or those who are unable to manage their own finances.

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Managed accounts offer several benefits, but also come with some drawbacks.

Customised managed accounts can meet the specific needs of the account holder, taking into account their individual goals and objectives.

Managed account transactions can be timed to minimise tax liability, giving investors more control over their tax obligations.

One of the main advantages of managed accounts is full transparency and leverage over assets, allowing investors to have a clear understanding of their investments.

However, managed accounts also require a significant initial investment of six-figure contributions, which may not be feasible for all investors.

Investment or disbursement of controlled account assets can take days, which may not be suitable for investors who need quick access to their funds.

A managed portfolio manager's annual charge can have an effect on the net return, reducing the overall profitability of the investment.

Here are the key pros and cons of managed accounts:

Sources and industry analysts expect greater managed account adoption due to comprehensive advice being a key differentiator. This helps participants know how much to save, how to invest, when to retire, how much to spend and from which accounts.

A focus on retirement income will boost managed accounts, with guaranteed plan income being a trend that's accelerating in the industry. This trend will lead to more managed account solutions that include an allocation to a guaranteed in-plan annuity or income solution.

Delivering personalized advice to participants will dovetail with the growth in adviser-managed accounts as a business model. This transition will amplify the role and value of the advisor, who will increasingly provide advice not just at the plan, but also at the participant level.

Managed accounts will also expand client service opportunities, including comprehensive financial planning services, financial wellness offerings and advice with respect to insurance products. This includes whether to purchase life, disability, and especially longevity insurance.

The ability to benchmark managed accounts is another positive development for managed account proponents. A new report benchmarks more comprehensive metrics for DC-plan-managed accounts, evaluating account provider quality, services, participant success measures and engagement, and extra services.

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