Definition
A Managed Account is a personalized investment portfolio where the ownership resides with an individual or institutional investor, but the day-to-day management is handled by a professional money manager. These accounts are tailored to align with the investor’s specific financial goals, risk tolerance, and investment preferences, offering a bespoke investment experience that differs significantly from pooled investment vehicles like mutual funds.
These money managers hold discretionary authority, empowering them to make investment decisions on behalf of the account holder without needing to get approval for each transaction.
How Managed Accounts Operate
Managed accounts function under the stewardship of appointed financial advisors or money managers. These professionals apply their expertise to construct and maintain a portfolio that aims to meet the predetermined investment objectives of the investor.
Fee Structure and Minimum Investments
The compensation for managing these accounts is typically a percentage-based fee computed on the Assets Under Management (AUM). Commonly, managed account providers set substantial minimum investment thresholds, starting from $50,000 to over $250,000, making them more suitable for affluent individuals.
Robo-Advisors as an Alternative
For those unable to meet the lofty minimums of traditional managed accounts, the emergence of robo-advisors has democratized access to managed investment solutions. These digital platforms use algorithms to manage portfolios, require much lower initial investments, sometimes as little as $5, and charge considerably lower management fees.
Comparison: Managed Accounts vs. Mutual Funds
While mutual funds are a form of managed accounts, there are stark differences mainly focused on personalization and control:
- Customization: Managed accounts offer tailored investment strategies customized to the client’s individual financial needs. In contrast, mutual funds operate on a collective investment scheme that follows a set investment objective.
- Investment Control: Investors in managed accounts can have significant input on transactions, potentially reducing tax liabilities. Mutual fund participants lack this control.
- Transparency and Fees: There is greater transparency in managed accounts, but they often come with higher fees compared to mutual funds, which have lower entry barriers and cost but less transparency.
Management Considerations
Both options employ professional managers, but the approach differs significantly. Managed accounts provide a one-on-one client-manager relationship, allowing for a more refined investment approach tailored to the individual’s specific needs. Mutual funds, being collective investments, aim to achieve broader objectives that align with the interests of a group of investors.
Related Terms
- Discretionary Authority: The power given to money managers to make investment decisions without the client’s approval for each action.
- Asset Under Management (AUM): The total market value of the assets that an investment company or financial institution manages on behalf of investors.
- Investment Portfolio: A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs).
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham - A timeless guide on value investing and managing personal finances.
- “Common Sense on Mutual Funds” by John C. Bogle - Insights on mutual funds and the broader mutual fund industry.
- “Wealth Management Unwrapped” by Charlotte B. Beyer - A thorough exploration of wealth management for high-net-worth individuals.
Managed accounts reshape the investment landscape, offering nuanced control and personalized strategies for investors who seek more than just the standardized offerings of mutual funds. With this understanding, investors can better navigate their choices, aligning their financial goals with the appropriate investment management solutions.
