Managed Accounts Guide

What is a Managed Account?

A managed account refers to an investment account, owned by a single investor who can either be an institutional, individual, or retail investor. The investor hires a professional money manager whose job it is to oversee the account. The dedicated manager possesses complete authority and control over the investor’s account. The manager makes investment decisions actively, which are applicable to the individual, after considering the client’s asset size, risk tolerance, and their needs and goals.

The money or investment manager has the authority to purchase and sell the assets of the investor without prior client approval on the condition that they act according to the client’s preferences and objectives. A managed account can contain cash, titles to property, and financial assets. 

What is Fiduciary?

A fiduciary refers to an individual or organization that manages assets on behalf of another individual or individuals. A managed account involves fiduciary duty. In other words, the manager is liable by law to act in their best interest of their client or face legal hassles and penalties. 

Investment Process

Managed accounts hold personalized investment portfolios that are customized to meet specific risk goals and the needs of the account holder. There are many reasons why investing in managed accounts appear slower than other financial investment methods.  It may take a lot of time for the manager to fully invest the money. He/she can only liquidate securities at certain points of time, depending on which holdings the manager selects. All of these make it a slower method of investment when compared with others such as mutual funds. But unlike mutual funds, high net worth individuals can make more individual decisions when it comes to managed accounts. 

Fees and Minimums

Managers usually charge an annual fee as compensation. This is equal to a certain percentage of the Assets under management or AUM. The AUM refers to the total market value of assets that a person or manager manages on behalf of a particular client. The fees for compensation can vary, with the average being somewhere around 1 to 2% of the AUM.  Based on the asset size of the accounts, some managers may provide discounts. This means the percentage fee decreases as the portfolio increases. The fees may be tax-deductible and are an investment expense. 

The Securities and Exchange Commission predefines the fees agreement for the manager. Managers receive a quarterly fee equal to one-fourth of the annual rates as specified in the fee structure. This is based on the last day of each calendar quarter on which the NYSE opens for trading. 

Types of Investment Accounts Possible

• Forex Managed Accounts: A forex managed account refers to a method of finance within the currency business, allowing even non-informed people to participate within the foreign exchange market. The required capital to open a forex managed account may be high such as $5000 when we compare with other options. 
• Portfolio of stocks: Managed accounts may just contain a portfolio of stocks from different industries and sectors. These accounts focus only on the stock market and a professional portfolio manager handles it. 
• Portfolio of mutual funds:  Also known as a Wrap account, a portfolio of mutual funds contains a basket of mutual funds, allowing even smaller investors to hire professional portfolio managers to handle their investments for him. 
• A diverse portfolio of funds, assets, cash, or property titles: Managed accounts can also contain a diverse range of mutual funds, along with cash, property titles, and a host of other assets. The mix of assets helps in balancing out any losses if one part of the portfolio underperforms, or if one industry or sector is not profitable. 
• 401(k): A 401(k) refers to a corporate-sponsored account which an employer provides to an employee. Employees designate a percentage of their income that they want to contribute, which the employee automatically deducts and invests based on the employee’s pre-selected investment options.  Generally, companies match fifty percent of the first 6% an employee contributes. The maximum contribution for a single employee is $19500 while that of the individual and employee together is $57000. 
• IRA Account –  An IRA account is designed to help an individual save for retirement.  They provide significant tax benefits to the IRA, helping individuals save more of their money. The most common types of IRAs are traditional IRAs and Roth IRAs. While individuals with a traditional IRA get taxed on their contributions when they withdraw, Roth IRA holders get taxed at the beginning. 

How to build confidence with your account manager?

• Do a background check of Account Manager’s track record: Before signing up with any managed account service, the investor should check out the track record of the account manager. They should produce some risk metrics, without divulging their full details. While conducting a background check, investors have to make sure that the account manager is considering a relative return, volatility, tracking error, Sharpe ratios, and other metrics when making trading decisions. Simply producing high profitability isn’t an assurance of a manager’s methodology. 
• Discussing goals, risks, and investment horizon: Before starting, the investor should discuss his/her investment preferences, perceived risk that they can take, and investment horizon in detail to the Account Manager. Account managers should be aware of these before they make decisions on their client’s behalf. 
• Choose investment strategy from proposed by Account manager: After considering the requirements of the investors, managers provide multiple investment strategies to choose from. Investors can choose anyone, according to their preference and risk aversion. 
• Opening an account and creating a portfolio: In the next step, the manager helps the investor open a managed account. They will assist them in creating a portfolio, offering suggestions on which assets or financial vehicles they include. 
• Report and Rebalance in long-term:  One of the biggest responsibilities of an Account manager is to forecast and track key account metrics. This includes quarterly results, annual forecasts, and returns, which they should report in a transparent fashion to the investor or account owner.