What is a Managed Account?

A managed account is a fee-based investment management product for high net worth individuals. Managed accounts started as separately managed accounts (SMAs) and have since evolved into multiple strategy accounts (MSAs) and the rapidly emerging unified managed accounts (UMAs). The appeal of managed accounts is the access to professional money managers, a high degree of customization and greater tax efficiencies in a fee-based product

Whether you refer to them as “individually managed accounts” or “separately managed accounts,” managed accounts have gone mainstream. To understand why they have such a strong appeal to affluent investors, consider the history of professional money management. Industry titans of the past made their money in heavy industry and then hired professional money managers to oversee their wealth. Likewise, large pension plans, endowments and other institutional investors have often entrusted their assets to professional money-management firms. With minimum investment requirements of $1 million or more, the services of these money managers have historically been well out of reach of the average investor.

Over time, investors saw the benefits of professional money management and wanted access to those benefits. The rise of the mutual-fund industry partially met that need, enabling investors to pool their assets and create portfolios large enough to attract professional money-management firms. What mutual funds cannot offer, due to their structure as investments shared by a group of investors, is the benefit of customized portfolio management. Separate accounts overcome this barrier.

Courtesy of technological advances, money-management firms have been able to significantly reduce their minimum investment requirements to well below the traditional $1 million mark. Instead of pooling their assets with those of other investors, a much larger audience of affluent investors can now access the benefits of customized portfolio management via separate accounts.

Separate accounts are similar to mutual funds in that a money manager develops a model portfolio specializing in a particular aspect of the market (such as large-cap, growth, small-cap or value) and purchases or sells securities in an effort to generate positive returns. The key difference between mutual funds and separate accounts is that, in a separate account, the money manager is purchasing the securities in the portfolio on behalf on the investor, not on behalf of the fund.

In a separate account, the investor does own those shares. If a separate account portfolio model includes shares of Company 1 and shares of Company 2, when you invest in that model portfolio, the money manager purchases shares of each of those companies on your behalf. Your account is “separate” and distinct from that of any other investor in that model, which (unlike mutual funds) gives you the ability to direct the money manager to customize the portfolio based on your personal needs. While it would defeat the purpose of hiring a professional manager if you attempted to micro-manage every buy/sell decision made in the portfolio, there are areas where it can be of significant value to make your voice heard.

Fee-based asset management allows you and your financial advisor to share a common goal—to grow the value of your assets. A long-term approach to investing, fee-based asset management ties your advisor’s compensation directly to the performance of your account. Instead of commissions, your advisor earns an annual fee based on the market value of the account. You and your advisor concentrate on what matters most—building an investment portfolio designed to help meet your specific needs

To maximize the benefits separate accounts offer, most investors work with a professional investment advisor. The advisor provides assistance with asset-allocation decisions, money-manager selection, as well as coordination of portfolio customization and gain/loss harvesting.