Managed Account

Updated on 2023-08-29T11:54:43.453142Z

A managed account is an investment that is owned by the investor but is managed by another party. The owner or holder of the account can be an individual retail investor or an institutional investor. The owner hires an expert and experienced money manager to manage the account along with handling the trading activities.

The money manager is empowered with discretionary authority over the managed accounts and makes investment decisions on behalf of the account holder. The investment decision is made in alignment with the investor’s goal, risk tolerance, asset size and needs. Managed accounts are considered as the high-net-worth investment.

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Frequently Asked Questions (FAQs)

How managed accounts work?

Three key players are involved in the managed accounts: the investor, investment manager, and financial advisor. All the members enter a partnership with varying goals, but the aim of the partnership is to work towards meeting the investment goals of the principal owner of the account. The individual perspective of the investment manager and the financial manager creates a distinction between them.The function of the investment manager is to monitor and adjust the investment options of the managed accounts. The financial advisor’s area of focus is the financial situation of the investor. An investment is made in the managed accounts with the aim to meet some pre-determined investment goals. The managed account may include titles of property, cash, or any other financial asset.

It is assumed that the investment managers undertake investment decisions by giving due consideration to the client's investment goals. Then the manager does not require to take permission from the client prior to conducting any transaction. The manager owes a fiduciary duty to the principal client and his/her activities must be conducted in good faith and with utmost loyalty. Else, the manager must face civil or criminal penalties because of the breach of contract and the right of compensation. It is the duty of the investment manager to disclose all the details regarding the account and its performance to the client.

A managed account has a transaction fee structure and minimum investment requirements attached to it. The majority of the money managers accept a minimum investment amount of $250,000, however, some money managers might accept the minimum amount of $100,000 and $150,000.

The manager's annual fee depends on the proportion of the AUM (assets under management). Generally, the money manager charges 1% and 2% of the AUM. The amount or the percentage of the discount offered by the manager is calculated based on the account’s asset size. The discount will be very low in case of the small asset size and vice versa. Since the fee is the investment expense, it is tax-deductible.

What are the types of managed accounts?

Individually managed accounts – IMAs are share portfolios that are built, customised, and managed by the investment manager for an investor. An investor can exclude or include specific shares as per their needs and preferences from the portfolio. IMA is effective in meeting the personalised goals of a client and is suitable for those who can invest a minimum of $500,000 or more.

Separately managed accounts – SMAs are product-based services that are available with the investment firm. As per the client's needs and requirements, an SMA model is suggested by the firm. It is a model which provides security to portfolio-based investment. A model portfolio is a range of assets that are owned by the investors. The different model offers different benefits. In case the investor wishes to invest in different portfolios, then they have to open different accounts. The investment manager must manage the portfolio selected by the client, and the client is updated about the portfolio’s performance on a regular basis.

Managed discretionary accounts – In MDAs, the client's permission is not required by the money manager while undertaking purchase or sell transactions as a manager is given the discretionary power. The investor and the manager signed a discretionary agreement that states the limits regarding the transactions and the rules that the manager must follow. The fee is higher in the MDAs as the managers are responsible for making decisions and conducting transactions.

Unified Managed Accounts – In the UMAs, the investment manager manages different assets such as bonds, ETFs, mutual funds, and so on. Unlike SMAs, the investor is not required to open separate accounts as all the assets can be combined in the UMAs. The performance of different assets can be compared easily in the UMAs.

How to invest in managed accounts?

Before investing in the managed accounts, a professional money manager should be selected with exclusive training, certifications, and experience to manage one’s portfolio and give excellent advice. The exchanges and the government generally regulate the money managers. For example, the US Securities and Exchange Commission regulates the money manager of the US. Moreover, they are regulated under the US Investment Advisers Act, 1940.

Is there any similarity between managed accounts and mutual funds?

There is a similarity between mutual funds and the managed accounts, that is, both involve active management of the portfolio, and the funds can be invested in a range of financial assets. Mutual fund can be categorised as a managed account in which the money manager is appointed to manage the investments in a portfolio.

Similarly, in the managed accounts, the manager has the discretionary power to manage the portfolio on behalf of the client and in alignment with the client’s investment objectives. In the 1950s, the investment in then mutual funds hit the record as it was seen as an investment vehicle for retail investors as they were able to gain access to professional expertise for managing their funds.