Managed account

What Is a Managed Account?

A managed account is an investment portfolio owned by an individual investor but overseen and managed by a professional financial advisor or investment firm. This service falls under the broader category of investment management, where experts handle the day-to-day decisions regarding buying, selling, and managing securities on behalf of the client. The primary goal of a managed account is to align the investment strategy with the client's specific financial goals, risk tolerance, and time horizon without requiring the client to make every individual investment decision. Managed accounts offer professional oversight, aiming to provide a disciplined approach to building and maintaining an investment portfolio that benefits from strategic asset allocation and ongoing rebalancing. Clients typically grant discretion to the advisor to execute trades and manage the portfolio within predefined parameters.

History and Origin

The concept of professional investment management has evolved over centuries, but managed accounts, as recognized today, gained prominence with the formalization of investment advisory services. A significant milestone in the regulation of investment advisors in the United States was the passage of the Investment Advisers Act of 1940. This federal law requires firms or individuals compensated for providing investment advice about securities to register with the U.S. Securities and Exchange Commission (SEC) and adhere to regulations designed to protect investors.⁸,⁷ The Act laid foundational rules for how investment advisors operate, including requirements for disclosure and ethical conduct.

The landscape of investment advice has continued to evolve, particularly with discussions around a higher "fiduciary standard." Historically, some financial professionals operated under a "suitability" standard, recommending investments that were suitable for a client, but not necessarily in their absolute best interest. However, a push for greater investor protection, notably the Department of Labor's (DOL) efforts to implement a broad fiduciary rule for retirement accounts, highlighted the importance of advisors acting in their clients' best interests. While the DOL's 2016 fiduciary rule faced legal challenges and was later vacated, the conversation around advisor ethics and client-centric advice remains prominent in the financial industry.⁶, This ongoing evolution underscores the increasing emphasis on professional standards for those managing client assets in managed accounts.

Key Takeaways

• A managed account provides professional oversight of an investor's portfolio by a financial advisor or firm.
• The advisor makes investment decisions and executes trades based on the client's established goals and risk profile.
• Managed accounts typically charge an advisory fee, often as a percentage of assets under management.
• Benefits can include expertise, discipline, and ongoing portfolio adjustments.
• Regulations, such as the Investment Advisers Act of 1940, govern the conduct of those managing these accounts.

Interpreting the Managed Account

A managed account is interpreted through the lens of personalized financial service. Unlike simply buying into a mutual fund or exchange-traded fund, where an investor buys shares of a pooled investment vehicle, a managed account involves an individual portfolio tailored to the client. This customization means that the performance and suitability of a managed account are evaluated against the client's specific objectives, rather than against a broad market benchmark alone.

Investors should review regular statements to understand how their managed account is performing relative to their goals and the agreed-upon investment strategy. Key aspects to interpret include the portfolio's adherence to the established diversification plan, the allocation across various asset classes, and the fees being charged. Transparency in reporting and open communication with the advisor are crucial for effective interpretation and ongoing success of the managed account.

Hypothetical Example

Sarah, a 45-year-old marketing executive, wants to save for retirement but lacks the time and expertise to manage her investments actively. She decides to open a managed account with an investment advisory firm.

1. Initial Consultation: Sarah meets with a financial planner at the firm. They discuss her financial goals (retire by 65), her time horizon (20 years), and her risk tolerance (moderate).
2. Investment Policy Statement: Based on their discussion, the advisor drafts an Investment Policy Statement (IPS), outlining the agreed-upon asset allocation (e.g., 60% equities, 30% fixed income, 10% alternatives) and the specific types of securities that will be held in her managed account.
3. Funding and Management: Sarah funds her account with an initial deposit. The advisor then selects a mix of stocks, bonds, and ETFs according to the IPS.
4. Ongoing Adjustments: Over time, as market conditions change, the advisor rebalances the portfolio to maintain the target asset allocation. For instance, if equities perform exceptionally well and become 70% of the portfolio, the advisor might sell some stocks and buy more bonds to bring the allocation back to 60/30/10. Sarah receives quarterly statements detailing her account's performance and holdings.

Practical Applications

Managed accounts are widely applied in various financial contexts, offering professional oversight for a range of investor needs.

• Wealth Management: High-net-worth individuals often utilize managed accounts for comprehensive wealth management, including tax-efficient investing and estate planning considerations.
• Retirement Planning: Managed accounts are common for retirement planning, such as Individual Retirement Accounts (IRAs) or 401(k) rollovers, where investors seek professional guidance to grow their nest egg over a long horizon.
• Trust and Charitable Accounts: Fiduciaries managing trusts or charitable endowments may use managed accounts to ensure the assets are invested prudently and in accordance with the trust's objectives.
• Institutional Investing: While the term "managed account" often refers to individual investors, institutions like pension funds or university endowments also employ professional managers for their vast pools of assets, operating on similar principles of delegated management.

A significant aspect of managed accounts is the fee structure. Investment advisors managing these accounts are typically fee-based, charging an advisory fee as a percentage of the assets under management (AUM). This differs from a commission-based model where an advisor earns a fee each time a transaction occurs.⁵,⁴ The Securities and Exchange Commission (SEC) provides guidance and regulations concerning investment fees and expenses, emphasizing the importance of understanding all costs associated with an investment portfolio.³

Limitations and Criticisms

While managed accounts offer significant benefits, they also come with limitations and criticisms that investors should consider.

One primary concern is the cost. Managed accounts often charge an ongoing advisory fee, typically a percentage of the assets under management. While this fee compensates the professional for their expertise and ongoing management, it can accumulate over time and significantly impact overall returns, especially if the account balance is large or the returns are modest.² Investors must carefully evaluate the value received versus the fees paid, which may also include underlying fund expenses if the account invests in mutual funds or ETFs.

Another critique revolves around the actual "value" of financial advice. Some academic research has explored whether financial advisors consistently add enough value through their investment recommendations to justify their fees. For instance, a 2014 study examining the Canadian financial advisory industry found that while advisors influence investor behavior, their investment recommendations did not consistently produce returns that reliably covered their fees when judged against passive investment benchmarks.¹ This suggests that while advisors may provide benefits in areas like behavioral coaching or financial planning, superior investment performance alone may not always be a guaranteed outcome. Investors should be aware that even with professional management, there are no guarantees of specific returns, and market risks remain.

Managed Account vs. Self-directed brokerage account

The key distinction between a managed account and a self-directed brokerage account lies in who makes the investment decisions and how the service provider is compensated.

Confusion often arises because both types of accounts involve investing in securities. However, a managed account delegates the crucial aspect of investment decision-making to an expert, whereas a self-directed brokerage account empowers the investor to make all decisions independently. Investors seeking hands-on control and willing to research and execute trades themselves typically opt for a self-directed account, while those preferring professional guidance and a more passive role often choose a managed account.

FAQs

What types of investments are held in a managed account?

A managed account can hold a wide range of investments, including individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities. The specific holdings depend on the client's investment strategy, risk tolerance, and the advisor's approach to portfolio construction.

How are managed account fees typically calculated?

Most managed accounts charge an advisory fee based on a percentage of the assets under management (AUM). For example, an annual fee of 1% on a $500,000 managed account would amount to $5,000 per year. Some advisors may use a tiered fee structure, where the percentage decreases as the AUM increases. These fees are typically deducted directly from the account.

Is a managed account suitable for all investors?

A managed account is generally suitable for investors who prefer to delegate investment decisions to a professional, have specific financial goals, and are comfortable paying a fee for ongoing management. It can be particularly beneficial for those who lack the time, expertise, or desire to actively manage their own investment portfolio. It may be less suitable for highly active traders or those who prefer to make all investment decisions independently to minimize fees.