A Managed Account is an investment account consisting of assets that one or more clients entrust to a professional manager or management firm. The manager is responsible for making investment decisions on behalf of the client(s) based on predefined objectives and guidelines. Typical managers include financial advisors, bank trust departments, and investment advisory firms.
Types of Managed Accounts
Managed accounts come in various forms to suit different investment needs and risk appetites:
Separately Managed Accounts (SMAs)
- Definition: Individually managed investment accounts tailored to meet the specific needs of the account holder.
- Characteristics: High customization, direct ownership of securities, and often higher minimum investment requirements.
Unified Managed Accounts (UMAs)
- Definition: Investment accounts that combine multiple types of investments—such as stocks, bonds, mutual funds, and ETFs—into a single account.
- Characteristics: Diversification, centralized reporting, and simplified portfolio management.
Wrap Accounts
- Definition: Defined by bundled services, typically including investment management, advisory, and brokerage services, all covered under a single fee structure.
- Characteristics: Easy fee structure, integrated service model, and suitability for clients seeking less complexity.
Special Considerations
Management Fees
Managed accounts typically charge an annual management fee, varying between 0.5% and 2% of the account balance, depending on the complexity and size of the portfolio.
Performance Evaluation
The effectiveness of a managed account is often assessed using benchmarks such as the S&P 500, providing a standard for comparing performance.
Custody and Safety
Assets within managed accounts are held by custodian banks, which provide an added layer of safety and transparency.
Examples of Managed Accounts
- Wealth Management Accounts: Often used by high-net-worth individuals, these accounts are managed to achieve long-term financial goals.
- Retirement Accounts: Managed to maximize returns suitable for retirement, taking into account the investor’s life stage and risk tolerance.
- Institutional Managed Accounts: Corporate or institutional funds that are managed to meet specific mandates such as pension obligations or endowments.
Historical Context
Managed accounts have evolved over time from traditional advisory roles performed by banks to sophisticated platforms managed by fintech companies. The modern landscape includes digital robo-advisors, which leverage algorithms to manage portfolios.
Applicability
Individual Investors
- Benefits: Professional management, potential for better returns, and customization based on personal goals.
- Risks: Management fees may erode net returns, and a manager’s investment strategy may not align perfectly with the client’s risk tolerance.
Institutional Investors
- Benefits: Expertise in achieving specific mandates and compliance with regulatory requirements.
- Risks: Dependence on the manager’s performance and potential conflicts of interest.
Comparisons
Managed Account vs. Mutual Fund
| Aspect | Managed Account | Mutual Fund |
|---|---|---|
| Ownership | Direct ownership of securities | Ownership of fund shares |
| Customization | High | Low |
| Fees | Typically higher | Generally lower |
| Minimum Investment | Usually higher | Often lower |
| Performance Reporting | Individualized | Fund level |
Related Terms
- Investment Management: The practice of managing investments to achieve a specific client objective.
- Asset Allocation: The process of distributing investments among different categories to optimize risk and return.
- Robo-Advisor: An online platform that provides automated, algorithm-driven financial planning services with little human supervision.
FAQs
What is the primary advantage of a managed account?
Are managed accounts suitable for everyone?
How are fees structured in managed accounts?
References
- “Investment Management: Theory and Practice” by Martin L. Leibowitz and Anthony Bova.
- U.S. Securities and Exchange Commission (SEC) guidelines on investment advisors.
- “The Intelligent Investor” by Benjamin Graham.
Summary
A Managed Account offers tailored investment solutions managed by professional advisors or firms. These accounts provide various benefits, including professional management, customization, and potentially higher returns, albeit with higher fees. They represent a significant avenue for both individual and institutional investors seeking specialized management of their assets. Proper understanding and evaluation of fees, risks, and manager performance are crucial for optimizing investments in managed accounts.
