What Is a Managed Account?
Key takeaways
– A managed account is an investment account owned by an individual or institution but actively run by a professional money manager who has discretionary authority to buy and sell assets on the owner’s behalf. (Investopedia)
– Managed accounts are typically customizable, offer high transparency and tax-management flexibility, and are most common for high‑net‑worth investors because of minimums and fee levels.
– Typical manager fees run roughly 1%–2% of assets under management (AUM); robo‑advisors provide a lower‑cost, automated alternative (often ~0.25% AUM). (Investopedia; SoFi)
– Managers who exercise discretion generally owe a fiduciary duty and must act in the client’s best interest; tax treatment and liquidity differ from pooled products such as mutual funds. (Investopedia; IRS)
How a managed account works
– Account ownership and control: The investor owns the account and the underlying securities. By contractual agreement the investor gives a manager discretionary authority to trade the account in line with stated objectives and constraints.
– Customization: The manager constructs and adjusts the portfolio to reflect the owner’s goals, risk tolerance, tax preferences, concentration/ESG constraints, liquidity needs, and any other restrictions.
– Reporting and custody: The manager typically provides regular performance and holdings reports. Assets are usually held at a third‑party custodian for safety and operational separation.
– Fees and minimums: Managers commonly charge an annual fee (a percentage of AUM). Minimum account sizes are often significant—many managers start at $50,000–$250,000—though some robo‑advisors have much lower minimums. (Investopedia)
Important
– Fiduciary duty: Managers with discretionary authority normally must act as fiduciaries, placing the client’s interests ahead of their own and disclosing conflicts of interest.
– Tax treatment: Manager advisory fees are generally not tax‑deductible for most individual investors following changes in tax law (see IRS guidance). Managers can, however, implement tax‑aware strategies (e.g., tax‑loss harvesting) to reduce client taxes at the account level. (IRS; Investopedia)
– Documentation: Before granting discretion, investors should review the investment management agreement, Investment Policy Statement (IPS), and ADV (for SEC‑registered advisers) to understand fees, services, and conflicts.
Managed accounts vs. mutual funds
– Ownership: In a managed account the investor owns the individual securities; in a mutual fund the investor owns shares of the fund (not the specific underlying securities). (Investopedia)
– Customization: Managed accounts are tailored to the individual’s objectives and constraints; mutual funds follow predefined objectives for all shareholders. (Investopedia)
– Tax management: Managers can time trades in a managed account to limit taxable gains for that investor. Mutual fund investors cannot control when the fund realizes gains and may receive capital‑gains distributions. (Investopedia)
– Transparency and control: Managed accounts offer full visibility into holdings and more direct control (subject to agreed constraints); mutual funds give only periodic disclosures and no direct investor control. (Investopedia)
– Minimums and liquidity: Managed accounts often have higher minimums and may be slower to fully invest or liquidate, whereas mutual fund shares are typically buyable/redeemable daily and have much lower minimums. (Investopedia)
– Fees: Managed account fees (1%–2% typical) can be higher than many mutual fund expense ratios; robo‑advisors and index funds are lower‑cost alternatives. (Investopedia; SoFi)
Management considerations (what to evaluate in a manager)
– Fiduciary status and registration: Is the manager a registered investment adviser (RIA) and legally a fiduciary? Request Form ADV Part 2 and other regulatory disclosures.
– Experience and track record: Ask about the manager’s experience with similar account sizes, strategies, and market environments; request audited or verified performance history.
– Investment philosophy and process: How are securities selected, and what is the rebalancing, risk‑management, and research process?
– Fees and fee structure: Understand AUM fees, performance fees (if any), trading costs, custodial fees, and whether there’s a “wrap” fee that bundles services.
– Minimums and liquidity policy: What is the minimum investment and are there restrictions or notice periods for withdrawals?
– Tax management capabilities: Can the manager perform tax‑loss harvesting, lot‑level tax management, and other tax‑aware trades?
– Conflicts and compensation: Disclose any relationships with brokers, soft‑dollar arrangements, or revenue sharing.
– Reporting and communication: Frequency and format of statements, performance reports, and review meetings.
Transactional considerations
– Trade timing and liquidity: Managed account trades may be timed for tax benefit or liquidity constraints and can sometimes take days to fully implement. Illiquid securities or private investments can further slow execution.
– Custody and settlement: Ensure assets are custodied at a reputable third party and understand how cash flows and settlements are handled.
– Tax lots and bookkeeping: Managed accounts permit lot‑level tracking (useful for tax optimization and concentrated position management).
– Costs beyond management fee: Trading commissions, bid/ask spreads, and third‑party fees can affect net return; determine whether the manager minimizes trading costs and how those costs are billed.
Special considerations
– High‑net‑worth and institutional use: Institutions and large pension funds have increasingly shifted some allocations from pooled hedge funds to separate managed accounts for transparency, daily valuation, lower fees, and control over exposures. (Pensions & Investments; Investopedia)
– Robo‑advisors: For investors who want professional portfolio construction at lower cost and with low minimums, automated “robo” platforms offer algorithmic management but limited customization and human oversight. (SoFi; Investopedia)
– Concentrated positions and overlays: Managed accounts can incorporate concentrated stock management, hedging overlays, or income/data tax overlays tailored to one investor—capabilities not typically available in pooled funds.
– Minimum deposit and economies of scale: Larger accounts commonly receive fee breaks and access to additional services unavailable to smaller accounts.
Practical steps — how to get started, what to do, and what to ask
1. Clarify your objectives and constraints
– Define goals (growth, income, preservation), time horizon, risk tolerance, liquidity needs, tax preferences, and any restrictions (ESG, sector exclusions, concentrated positions).
2. Decide on the level of customization vs. cost
– If you want a highly personalized strategy and direct ownership, consider a managed account with a human advisor.
– If low cost and simplicity matter more, evaluate robo‑advisors or low‑cost mutual funds/ETFs.
3. Screen and select potential managers
– Verify registration (Form ADV for RIAs), fiduciary duty, credentials (CFP®, CFA®), and client references.
– Ask for sample agreements, fee schedules, performance history for comparable mandates, and typical investment minimums.
4. Ask key questions before signing
– Are you a fiduciary? How are you compensated? What’s included in the fee? What are the minimums? Who will execute trades and who provides custody? How do you handle conflicts of interest? What tax services are provided? How often will we review performance?
5. Establish documentation and controls
– Create an Investment Policy Statement (IPS) that states objectives, risk limits, tax rules, liquidity requirements, prohibited investments, and benchmark(s).
– Sign a management agreement that clearly defines discretionary authority, termination rights, reporting cadence, and fee billing.
6. Open and fund the account
– Work with the chosen custodian to open account, transfer assets, and set up reporting and electronic access. Consider in‑kind transfers for concentrated holdings where appropriate.
7. Monitor performance and governance
– Review monthly/quarterly statements and annual summaries; compare performance to agreed benchmarks and peers; meet at least annually to revisit objectives and IPS.
– Keep an eye on fees, turnover, tax outcomes, and any unexpected trades or violations of constraints.
8. Periodically reassess and, if necessary, terminate
– Reassess whether the managed account continues to meet goals; if terminating, understand transfer/exit procedures and any termination fees. Make sure final tax lots and performance records are delivered.
When a managed account makes sense (common use cases)
– You have a sizeable portfolio and need bespoke tax, risk, or estate planning.
– You require control and transparency over individual holdings.
– You hold concentrated positions that need specialized handling (hedging or gradual monetization).
– You are an institution seeking separate account solutions for governance and fee transparency.
When to consider alternatives
– If you have a small account balance, limited need for customization, or cost sensitivity—consider robo‑advisors, index funds, or low‑cost mutual funds instead.
Sources and further reading
– Investopedia — “Managed Account” (source material used): https://www.investopedia.com/terms/m/managedaccount.asp
– Vanguard — Vanguard Personal Advisor Services (overview of managed/advisory offerings): https://investor.vanguard.com
– Fidelity — Fidelity Managed Accounts (service descriptions): https://www.fidelity.com
– IRS Publication 529 — Miscellaneous Deductions (tax guidance relevant to investment‑related deductions): https://www.irs.gov/forms-pubs/about-publication-529
– SoFi — How to Compare Robo Investing Fees (robo‑advisor fee comparison): https://www.sofi.com
– Pensions & Investments — “Investors Warming up to Managed Accounts” (institutional movement toward managed accounts): https://www.pionline.com
If you’d like, I can:
– Provide a one‑page checklist of questions to ask a manager during an initial interview.
– Draft an Investment Policy Statement (IPS) template tailored to your objectives.
– Compare three specific managers or robo‑advisors based on fees, minimums, and services. Which would you prefer?