Managed Account

A managed account, also known as a managed investment account (MIA) or managed financial account (MFA), is a type of investment account that is owned by an individual investor but overseen by a professional money manager, hired by the client, who makes investment decisions on behalf of the client. This arrangement is often favored by affluent investors who wish to employ a level of personalized investment management that offers more tailored and bespoke solutions compared to mutual funds or exchange-traded funds (ETFs). Managed accounts can encompass a variety of asset classes, including equities, fixed income, commodities, and more sophisticated financial products.

Types of Managed Accounts

Separately Managed Accounts (SMAs)

Separately Managed Accounts (SMAs) are individually managed investment accounts created for a single investor. Unlike mutual funds, where the investor owns shares in a pooled fund, an SMA provides direct ownership of the securities within the account. This allows for greater customization and potential tax advantages.

Unified Managed Accounts (UMAs)

Unified Managed Accounts (UMAs) are all-in-one investment solutions that consolidate multiple types of investment assets within a single account. A UMA might include mutual funds, ETFs, individual securities, and alternative investments. This method simplifies reporting and management and can offer enhanced diversification.

Wrap Accounts

Wrap accounts charge a single, all-inclusive fee that covers administrative fees, transaction costs, and advisory fees. This makes it easier for investors to understand the total cost of their investment, although wrap fees can be relatively high.

Hedge Funds and Private Equity

Although not always classified as traditional managed accounts, hedge funds and private equity investments are managed investment vehicles that offer sophisticated strategies aimed at outperforming traditional markets. These funds are often available through managed account structures.

Key Features of Managed Accounts

Customization

One of the most distinguishing features of managed accounts is the level of customization they offer. Unlike mutual funds or ETFs, managed accounts allow the investor to tailor the portfolio to meet their specific needs, risk tolerance, and investment objectives. For example, an investor could impose socially responsible investing guidelines or prioritize certain asset classes.

Active Management

Managed accounts are actively managed, meaning that the money manager frequently buys and sells securities to achieve the client’s investment objectives. This stands in contrast to passively managed investments, like index funds, which aim to replicate a market index.

Transparency

With managed accounts, investors have complete transparency regarding their holdings, transactions, and fees. This is beneficial for investors who seek a detailed understanding of their investments and associated costs.

Tax Efficiency

Managed accounts can be structured to optimize tax efficiency through strategies such as tax-loss harvesting. Direct ownership of securities allows for individualized tax management, which can be more advantageous compared to the shared ownership of mutual funds.

Advantages and Disadvantages of Managed Accounts

Advantages

• Personalization: The level of customization available allows for portfolios tailored to individual investment goals, risk tolerance, and preferences.
• Transparency: Investors receive detailed statements showing all transactions, holdings, and fees, providing a clear picture of their investments.
• Tax Efficiency: Through techniques such as tax-loss harvesting, managed accounts can help reduce the tax burden.
• Direct Ownership: Investors own the underlying securities, enabling personalized tax strategies and avoidance of mutual fund capital gains distributions.
• Professional Management: Access to professional management can lead to potentially higher returns and lower risks.

Disadvantages

• Cost: Managed accounts often come with higher fees due to the personalized service and active management.
• Minimum Investment: Many managed accounts require a high minimum investment, making them less accessible to smaller investors.
• Complexity: The complexity of managing a portfolio customized to an individual investor’s requirements might be overwhelming for some investors.
• Performance: There’s always risk involved, and professional management does not guarantee better performance. The success of a managed account depends heavily on the skill of the manager.

Fees and Cost Structure

Managed accounts typically have a fee structure that includes the following:

• Asset-Based Fees: The most common fee is a percentage of assets under management (AUM), which generally ranges from 0.5% to 2% annually.
• Performance Fees: Some managers charge performance fees, which are a percentage of the profits generated above a certain benchmark.
• Administrative Fees: These fees cover the operational costs of managing the account.
• Transaction Costs: Investors may also incur transaction costs for buying and selling securities within the account.

How to Choose a Managed Account

Define Your Needs and Goals

Before choosing a managed account, the investor should have a clear understanding of their financial goals, time horizon, risk tolerance, and investment preferences. This will guide the selection process.

Research and Due Diligence

It’s essential to perform thorough research and due diligence. This can include:

• Manager’s Track Record: Review the historical performance of the manager versus benchmarks.
• Fees and Expenses: Verify the total cost and ensure it aligns with the expected level of service and performance.
• Investment Philosophy and Strategy: Ensure the manager’s investment style matches the investor’s objectives.
• Regulatory Compliance and Transparency: Ensure the manager adheres to industry regulations and provides transparent reporting.

Interview Potential Managers

Interviewing potential managers can offer insights into their approach, communication style, and ability to manage the account in line with the investor’s objectives.

Start with a Trial Period

Some investors might benefit from starting with a smaller investment or trial period to evaluate the manager’s performance and approach before committing more substantial assets.

Trends and Future of Managed Accounts

Technological Integration

Technological advancements, including the use of algorithms and AI, are revolutionizing managed accounts by automating portfolio adjustments and enhancing decision-making processes. These innovations can provide real-time data analytics, which helps managers make more informed investment decisions.

Robo-Advisors

Robo-advisors are automated platforms offering algorithm-driven financial planning services with minimal human intervention. They typically provide lower-cost investment management options and can be a stepping stone for investors who are looking for managed solutions but at a lower cost.

ESG Investing

The rise of Environmental, Social, and Governance (ESG) criteria is influencing how managed accounts are structured. Investors increasingly demand that their portfolios reflect their values, leading to a surge in ESG-based managed accounts.

Increased Personalization

As consumer demand for personalized financial services grows, so does the need for managed accounts that offer even greater levels of customization. Advanced data analytics and customer profiling allow for highly personalized investment strategies.

Regulatory Changes

Regulatory changes are continually shaping the managed accounts industry. Increased scrutiny and the introduction of new compliance requirements ensure that managed accounts operate transparently and in the best interest of the clients.

Hybrid Models

Hybrid models that combine traditional human advisory services with robo-advisory platforms are gaining popularity. These models aim to bring the best of both worlds: the personalized touch of human advisors and the efficiency and cost-effectiveness of automated platforms.

Notable Firms Offering Managed Accounts

Several notable firms specialize in providing managed accounts, some of which include:

• Fidelity Investments: Fidelity offers a range of managed account solutions tailored to meet various investment goals and preferences. Fidelity Managed Accounts
• Charles Schwab: Schwab provides both personalized and automated managed account services, catering to a broad array of investor needs. Schwab Managed Accounts
• Vanguard: Known for its low-cost investment options, Vanguard offers managed account services, including personal advisor services. Vanguard Personal Advisor Services
• Morgan Stanley: Morgan Stanley Wealth Management provides a variety of managed account services, backed by a team of experienced financial advisors. Morgan Stanley Wealth Management
• BlackRock: As one of the leading asset managers in the world, BlackRock offers managed account solutions through its Aladdin platform. BlackRock Managed Accounts

Conclusion

Managed accounts offer a tailored investment solution for individuals seeking personalized portfolio management, transparency, and potential tax advantages. While the cost may be higher compared to other investment vehicles, the benefits of professional oversight, customized strategies, and active management can be significant. Investors should carefully consider their financial goals, perform thorough research, and select a managed account that aligns with their needs and expectations. The future of managed accounts looks promising, with technological advancements driving greater efficiency, personalization, and accessibility.