Managed Account Everything You Need to Know

Core Description

• A managed account is an individually owned investment portfolio overseen by a professional manager with discretionary authority.
• It offers tailored investment decisions, transparency, and tax advantages compared to pooled vehicles, while assets remain in the owner’s name.
• Managed accounts serve investors seeking personalization, tax management, and ongoing professional oversight, typically with higher minimum investments and fees.

Definition and Background

A managed account is a portfolio of assets owned by a single investor but managed by a licensed investment professional or firm, referred to as the manager. The defining feature is discretionary authority, allowing the manager to make day-to-day investment decisions—such as buying, selling, and rebalancing securities—without the client's prior consent for each action. This enables timely portfolio adjustments tailored to the client’s objectives, risk tolerance, investment horizon, and specific constraints, such as tax considerations or ethical screening.

Historical Perspective:
Managed accounts originated in the mid-20th century, typically within private banks and trust departments. These early portfolios were highly customized, often emphasizing blue-chip equities or government bonds for affluent clients. During the 1970s–1990s, separately managed accounts (SMAs) became more widespread among institutional investors and high-net-worth individuals, establishing manager discretion as a formal standard. Regulatory measures, such as the Investment Advisers Act, and later frameworks from the SEC and MiFID, enhanced professional standards, disclosure, and investor protection.

Evolution:
Advancements in technology during the 2000s led to unified managed accounts (UMAs), which digitized workflows, improved tax optimization, and broadened investor access. These innovations blended active and passive strategies, enabled diversification across multiple managers and assets, and improved efficiency. Today, managed accounts are accessible to more investors—including those interested in environmental, social, and governance (ESG) integration, factor-based strategies, or international asset management.

Calculation Methods and Applications

The structure and ongoing calculations of managed accounts involve several interconnected financial, operational, and compliance elements.

Fee Models

Managed account fees are generally calculated as a percentage of assets under management (AUM), ranging from 0.50% to 1.50% per year, with minimums often starting at USD 50,000 and exceeding USD 1,000,000 for fully bespoke solutions. Some providers offer wrap accounts, where advisory, trading, and custody fees are bundled at a total cost typically between 1.00%–2.00%. In some cases, performance fees apply, especially for institutional or specialized strategies, and are earned only if the manager delivers returns above a specified benchmark, often with high-water marks or hurdles.

Performance Measurement

Managed accounts are evaluated using time-weighted returns to remove the impact of external contributions or withdrawals. Money-weighted returns may also be calculated for individual client-level insights. Performance is reported both gross and net of fees, compared to an agreed-upon benchmark (such as S&P 500 or MSCI World Index). Many managers follow the Global Investment Performance Standards (GIPS) for enhanced transparency and consistency.

Applications in Practice

• Tailored Goal Setting: The investment process starts with an Investment Policy Statement (IPS) outlining the investor's objectives (such as retirement income or capital growth), risk profile, time horizon, liquidity preferences, and specific constraints (including tax and ESG requirements).
• Portfolio Construction: Managers assemble and regularly rebalance portfolios within the client-defined ranges, taking market trends, cash flows, or significant life changes into account.
• Risk Management: Monitoring involves enforcing exposure limits (by asset class, sector, or security), tracking volatility, stress testing the portfolio, and ensuring compliance with established policies.
• Tax Optimization: Managers may harvest tax losses, select specific tax lots for sale, and strategically manage the timing of taxable events, providing after-tax performance reporting when requested.
• Transparency and Reporting: Investors receive detailed reports on holdings, transactions, fees, and performance, ensuring comprehensive oversight.

For example, a U.S.-based high-net-worth investor might use a managed account to minimize capital gains taxes while maintaining a diversified mix of U.S. equities and municipal bonds, with quarterly performance tracked against a 60/40 benchmark and periodic loss harvesting.

Comparison, Advantages, and Common Misconceptions

Managed Accounts vs. Other Investment Vehicles

Key Advantages

• Customization: Portfolios are built to align with each investor’s objectives, restrictions, and beliefs, including social responsibility requirements or concentrated positions.
• Transparency: Full insight into underlying securities, transactions, and fee structures.
• Tax Efficiency: Ability to implement lot-level tax strategies, including loss harvesting and capital gains management.
• Professional Oversight: Expert management with discretion may reduce behavioral biases and ensure timely action.
• Asset Ownership: Securities are held individually in the client's name, providing greater control and flexibility in asset transfers.

Common Misconceptions

• Outperformance Guarantee: Managed accounts are designed to achieve client goals within a suitable risk profile, rather than to guarantee market-beating results.
• Equivalent to Mutual Funds: While strategies may be similar to popular funds, managed accounts are directly owned by the investor and allow individual restrictions and tactical adjustments.
• Full Investor Control: Investors set broad objectives and restrictions, but day-to-day investment decisions are handled by the manager for efficiency.
• Simplified Fee Structure: Fees can be composed of advisory, custody, trading, and platform charges, so clear disclosures are essential.
• Automatic Tax Benefits: Tax advantages need to be managed actively—realized gains are possible, and loss harvesting is not automatic.
• Past Performance Assurance: When selecting a manager or strategy, emphasis should be on process quality and historical consistency, not short-term results.
• Hiring One Manager is Diversification: Working with a single manager does not guarantee diversified risk—factor exposure and correlations must be evaluated.

Practical Guide

Step 1: Define Objectives and Constraints

Begin by establishing clear, measurable goals (for example, retirement income targets or capital growth), along with any constraints. Include time horizon, liquidity needs, tax considerations, legal restrictions, and preferences such as ESG. Document these in the Investment Policy Statement (IPS).

Step 2: Select Manager and Structure

Evaluate potential managers based on investment style, performance track record (net of fees), team continuity, and risk management controls. Choose an account format—SMA (single manager/strategy), UMA (multiple managers/strategies), or wrap account. Review regulatory filings (such as SEC Form ADV) and ensure the manager has necessary discretionary authority and operational resources.

Step 3: Draft the Investment Policy Statement (IPS)

Formally record investment goals, strategic asset allocation, benchmark selection, constraints on sectors or securities, rebalancing guidelines, and reporting requirements. All parties should sign the IPS, which serves as an ongoing reference.

Step 4: Understand Fees and Taxes

Request a fully itemized breakdown of costs: advisory fees, transaction commissions, custody fees, platform charges, and underlying fund fees if applicable. Ask for after-tax return projections, protocols for loss harvesting, and approaches to handling wash sales. Review minimum funding requirements and cash management processes.

Step 5: Fund the Account & Set Permissions

Transfer assets (cash and/or securities, specifying any “do not sell” holdings if relevant), and confirm appropriate permissions for trading, proxy voting, contributions, and withdrawals. Ensure all authentication and authorization procedures are properly in place.

Step 6: Monitor Performance and Risk

Regularly review performance and risk reports relative to benchmarks and comparable accounts. Track volatility, drawdown, tracking error, and asset allocation drift. Investigate any instances of significant underperformance or breaches of set risk limits.

Step 7: Communication and Governance

Establish a protocol for regular communication—monthly updates, quarterly reviews, and annual strategy meetings. Specify the required reporting content and criteria for inquiry escalation, such as changes in turnover, strategy drift, or key personnel.

Step 8: Adjust, Rebalance, or Exit

Adjust the portfolio as necessary, considering taxes and transaction costs. Update the IPS if investment objectives change significantly. When transferring or closing the account, coordinate asset movement to minimize additional costs and tax liabilities.

Case Study (Fictional Example – Not Investment Advice)

Jennifer, a technology entrepreneur in California with USD 2,000,000 to invest, seeks a portfolio focused on growth, diversification, and proactive tax management. She appoints a professional wealth manager, completes an IPS specifying a 70/30 allocation between equities and fixed income, prohibits energy sector investments, and prioritizes ESG factors. Over three years, the manager systematically conducts tax-loss harvesting during market downturns, rebalances when asset allocations surpass established bands, and holds regular quarterly review meetings. Comprehensive performance and tax reports help Jennifer to support her charitable giving plans with appreciated securities. This managed account framework aligns with both her financial goals and personal values.

Resources for Learning and Improvement

• Academic Journals:
  • Financial Analysts Journal, Journal of Portfolio Management, and Review of Financial Studies offer research on SMAs, wrap accounts, and custom portfolio approaches.
• Regulatory Resources:
  • SEC Investor.gov (investment adviser duties, wrap account disclosures)
  • FINRA Fee Insights
  • FCA InvestSmart (UK suitability guidelines)
• Industry Reports & Data:
  • Money Management Institute and Cerulli release regular industry reports on managed accounts.
  • Morningstar presents data on fees and model portfolio delivery.
• Professional Certifications:
  • CFA (Chartered Financial Analyst)—general investment expertise
  • CIMA (Certified Investment Management Analyst)—manager selection
  • CIPM (Certificate in Investment Performance Measurement)—reporting standards including GIPS
• Education Portals:
  • CFA Institute’s Glossary
  • Major brokerage education resources for account-specific topics
• Analysis Tools:
  • Zephyr PSN (SMA directories and attribution analysis)
  • FactSet and eVestment (risk, factor, and tax evaluation)
• Events and Media:
  • Morningstar Investment Conference, CFA Institute webinars, and relevant podcasts for industry developments
• Due Diligence Checklists:
  • SEC sample request lists and CFA manager selection templates for structured evaluation

FAQs

What is a managed account?

A managed account is an investment portfolio owned by an individual investor, where a licensed professional manager makes investment decisions based on the client’s specific financial goals, risk tolerance, and restrictions. Unlike pooled investment vehicles, assets are registered in the owner’s name, enabling greater transparency and tax management.

How does a managed account differ from a mutual fund or ETF?

Mutual funds and ETFs pool investor assets into a single fund with a shared investment strategy. In contrast, managed accounts are individually owned and offer customization, clearer reporting, and personalized tax management, though they often require higher minimum investments and may have higher costs.

What types of investors benefit most from managed accounts?

Managed accounts are suitable for high-net-worth individuals, professionals with concentrated holdings, investors prioritizing ESG integration, institutions with specific policy constraints, or those seeking active tax-loss management.

What fees should I expect with a managed account?

Expect advisory fees ranging from 0.5% to 1.5% per year on assets managed, with total bundled (“wrap”) services—encompassing trading and custody—sometimes reaching 2%. A transparent outline of all potential fees should be provided by your advisor.

Can I customize my holdings in a managed account?

You may specify restrictions, such as excluding certain sectors or securities, capping position sizes, or incorporating ESG screening. Note that excessive constraints can limit diversification and may affect tracking error and costs.

What are the risks or downsides of managed accounts?

Risks and challenges include higher costs, minimum balance requirements, possible tax consequences from active management, periods of performance below benchmarks, and the need for ongoing manager assessment.

How are assets safeguarded in a managed account?

Client assets are generally held by a qualified independent custodian in segregated accounts, helping to protect against risks stemming from manager or broker insolvency. Managers have only trading authority and cannot directly withdraw funds.

Are there liquidity limitations on managed accounts?

Most managed accounts offer substantial liquidity, but some strategies involving less-liquid securities may require notice periods or result in price impacts if large redemptions are made. Discuss expected transaction processing times and limits with your manager or provider.

Conclusion

Managed accounts provide a combination of professional expertise, personalization, and transparency for investors seeking portfolios suited to their unique financial objectives, risk tolerances, and personal priorities. Owners retain direct legal control over assets, benefiting from enhanced flexibility in tax management, reporting, and the application of individual restrictions or guidelines.

These advantages are often accompanied by greater complexity, higher minimum investment amounts, and the necessity for ongoing diligence in manager oversight. To maximize the value of a managed account, investors should conduct careful due diligence, establish clear and current investment mandates, monitor performance and risk systematically, and maintain consistent communication with their manager or adviser.

Managed accounts can be appropriate for affluent individuals, institutions, or anyone with specific legacy or tax consideration needs, offering a pathway to a distinctly personalized investment approach—provided the associated costs, requirements, and ongoing oversight are thoughtfully considered.