Managed Account

Managed account refers to a customized investment account managed by a professional investment manager on behalf of an investor. The manager creates a portfolio of investments keeping in mind an investor’s financial needs and goals.

Managed funds that pool money from different investors hardly allow for any customization. In managed accounts, an investor owns all the assets in the account and is transparently informed about their performance. The investor also holds the right to make investment decisions.

• A managed account is a tailored set of stocks and bonds usually owned by wealthy individuals who hire a money manager or professional investment manager to handle it.
• The money manager prepares a tax-efficient investment portfolio based on the size of the investment, investor’s risk profile and financial goals. The trading activities in the account are conducted in convergence with the above.
• The service fee varies as per firms or individual managers. Mostly, it is 1-2% of the investment amount. Other charges include transaction and trading cost.
• Also, the minimum investment amount has usually been high for these accounts, such as $1,00,000 or above. With technology, this amount has gone down, with some firms removing the criteria altogether.
• Over the years, these accounts have evolved to cater to the needs of the investors. They are major of four types: IMAs, SMAs, MDAs, and UMAs.

• Investment in the financial market to grow one’s assets requires expertise and time, which many often lack, especially the high-net-worth individuals (HNWIs). Investors have often taken the help of financial advisors and brokers to invest their funds in the market efficiently. Also, hedge funds, mutual funds, ETFs[ that involve the pooling of funds from investors have been sought by investors as a viable option to diversify their investment portfolio.
• For example, a typical hedge fund and its services available to wealthy clients have helped the investors achieve profits aggressively by taking more risks. The clients left the fund management to the fund manager. Although, a typical hedge fund is prone to implosions, and many have suffered huge losses due to that.
• As such, managed accounts started gaining more preference amongst the HNWIs. Many essays and news reports have talked about why such accounts are preferred over hedge funds. The primary reason being, managed accounts allow investors to receive detailed portfolio performance reports. That way, an investor can interfere and ask the manager to pull out of a risky investment. The manager is bound to comply.
• In these accounts, you assign funds to your money manager, who uses the funds to make a portfolio tailored to your investment goals, risk appetite, along with tax-efficiency. The portfolio could include stocks, bonds, mutual funds, listed property, etc. The ownership of the assets stays in the investor's name. The assets under a portfolio vary as per the investment firm; for example, DNR capital also invests in listed properties.
• The money manager will invest and trade on your behalf, keeping in mind your financial goals. Your preference is taken into consideration. So, the manager will not invest in a stock that is against your preference. In addition, the manager will report every detail of the account’s trading activity to you.

• Before you start investing in this service, select a professional money manager with ample experience and exclusive training to ensure you get excellent investment advice. In the U.S., money managers are regulated under the U.S. Investment Advisers Act of 1940 and the U.S. Securities and Exchange Commission (SEC).
• For decades, money managers have managed the funds of wealthy families and institutional pension plans. The average investor could not use their service because of the high minimum investment requirement that was normally around $1,00,000 or above. The amount has gone down significantly over the years, and it varies depending on the type of account.
• Moreover, the transactional fee was also very high. The service fee that is charged annually is calculated on the investment amount. Normally, it is 1-2% of the funds under management. Additional charges include transaction and trading charges. The fee has also gone down over the years. Besides, in some firms, the charges are negotiable.

• Suppose a businessman named Adam Fernandez opens a managed account having $2 million of assets and hires Giselle Ray as his money/investment manager. In this scenario, Giselle’s primary job responsibility is to manage Adam’s investments in the account as per his financial needs and goals.
• Giselle undertakes transactions on his behalf suited to Adam’s financial goals. However, she can’t do anything tantamount to breach of contract. So, as long as she successfully manages the assets as per the terms of the contract, it’s a win-win for both Adam and Giselle.
• Let's take an example from the real world. Based on Cerulli Associates’ findings, this report talks about how managed accounts grew at 13.1% during the second quarter of 2020. The industry assets improved to 7.4% from 2019’s $6.8 trillion.
• Moreover, apart from Forex money managers, some popular managed accounts providers include Fidelity, Citigroup, and Blackrock.

The terms and services offered under different types differ according to firms. We have provided a basic understanding of the types, with the major ones listed below.

#1 - Individually Managed Accounts (IMAs)

• IMAs are customized share portfolios built and managed by a money manager on behalf of an investor.
• An investor can include or exclude certain shares according to his preferences and needs from the manager’s model portfolio.
• IMA is mostly suitable for those with $500,000 or more. IMAs cater to the personalized goals of an investor.

#2 - Separately Managed Accounts (SMAs)

• SMAs are based on model securities portfolios available with an investment firm. It is a product-based service.
• The model portfolio is an assortment of securities owned by the investors. Different models offer different benefits. As such, clients need to open many separate accounts if they want to invest across different portfolios.
• SMAs offering firm select model portfolios as per the needs of the client. A professional portfolio or money manager manages them, but the client is regularly reported about the performance of the assets.
• An example is of Fidelity’s separately managed accounts offering model portfolios with varying features. Among many types, one comes with higher returns than the S&P 500® Index while another offers an assortment of different asset classes such as bank loans, stocks, bonds, etc.

#3 - Managed Discretionary Accounts (MDAs)

• MDAs are discretionary investment accounts that permit a money manager to trade investments without the investor’s approval for each transaction.
• The investor must sign a discretionary agreement with the manager setting limits regarding trading in the account the manager must adhere to.
• Money managers charge higher fees for MDAs as they have to handle every transaction and decisions, unlike non-discretionary accounts.

#4 - Unified Managed Accounts (UMAs)

• UMAs are investment accounts that permit a money manager to manage various investment assets such as mutual funds, bonds, ETFs in a single account. Unlike SMA, where the client has to open separate accounts, UMA unites them all.
• UMA enables an investor to compare the performance for different investments simultaneously.

This has been a guide to What is Managed Account and its Definition. Here we discuss how it works along with types, examples and how to start? You may also have a look at the following articles to learn more –

• Tontine
• Trust Account
• Fund of Funds (FOF)
• Escrow Account