What are Managed Accounts and How Do They Work?

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We have all heard of the wise teaching – one cannot build wealth by just working. To truly become wealthy, we have to let our money work for us, investing in capital-building investments.

As much as we would like to be able to do so, researching and picking the right investments takes up a lot of time and effort, resources many can ill-afford amidst their busy schedules.

Hence, many have chosen to invest in mutual funds or appointed professional investment solutions. This is the gist behind a managed account, allowing someone to manage your investment portfolio on your behalf, freeing up your time and energy for other endeavours.

What is a managed account?

As the name suggests, a managed account is an investment account owned by the investor but managed by someone else. These accounts can belong to an individual or institutional investor. 

The owner of the account provides the manager with discretionary authority over the account, delegating the right to make decisions pertaining to the investments to the manager. 

A managed account portfolio may consist of a variety of asset classes such as currencies, shares, commodities, real estate or others. 

How does it work?

There are three primary parties involved:

  • The client
  • The investment manager / financial advisor
  • The investment platform/brokerage

The client would generally be in contact with the manager or advisor to understand the investment strategy and objectives, before signing up for the managed account. .

The investment manager’s role is to construct the investment portfolio and trade the underlying assets to attain the stated investment objectives and profit targets. Investment managers are typically required to be regulated under various jurisdictions. 

Being responsible for the client’s money, the manager is bound by fiduciary duty and regulatory requirements to act in the best interests of the client.  Regular reports on the account are typically supplied by the managers, detailing its performance and holdings.

The fee structure for managed accounts typically consists of a management fee and performance fee. 

Management fees are a fixed fee charged as a percentage of the total AUM (asset under management), while performance fees are variable fees that are contingent upon the portfolio’s returns and are often subject to a high watermark standard. 

Portfolios that are more passive and aim to track benchmark indices typically do not charge performance fees, while more active portfolios that aim to generate absolute returns tend to command higher profit-sharing fees.

In addition, there may also be additional charges such as transaction fees for trading and buying/selling of investments via selected trading platforms.

managed account
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Types of managed accounts

Broadly, there are two types of managed accounts, either following a pre-determined portfolio model, or managed via a discretionary tailored manner.

Separately Managed Accounts (SMA)

Separately managed accounts or SMAs are non-unitised (non-pooled) investment schemes. . They are built on a model portfolio basis where a master portfolio is created by the manager, and every investor’s portfolio receives its proportionate amount of every trade and investment.

Individually Managed Discretionary Accounts

Unlike SMAs, such discretionary managed accounts are highly personalised, allowing clients to make some decisions to direct their portfolio’s composition. The manager will then curate a portfolio based on the client’s desired composition, and select the appropriate trades accordingly.

With greater flexibility, IMAs typically entail higher fees, as the fund manager has to tailor their strategies individually.

There are pros and cons to investing via a managed account structure, and it is up to the individual to decide if such a structure suits his / her needs.

Benefits of managed accounts

  • Managed accounts allow investors to access professionally-managed portfolios which can be selected or customized according to their investment preferences. 
  • Clients are relieved of the time, effort and risk needed in actively managing and optimising a portfolio on their own.
  • Clients can invest in strategies they are unfamiliar with or lacking confidence to employ, diversifying their portfolio
  • These typically do not come with withdrawal restrictions, lock-in periods, or exit fees attached, and allow greater flexibility and reporting for the investor.
  • Clients can periodically shift their portfolio composition to suit their investment needs..

Cons of managed accounts

  • Managed accounts typically require a sizable initial investment, to commence.
  • There may be multiple fee items attached which may impact the overall returns achieved.
  • The liquidation process may take longer than other investment structures as the account manager may require time to divest certain positions. .

How are managed accounts different from mutual funds?

Managed accounts and mutual funds share several characteristics. In general, they entail different structures for investors to get access to an investment. 

Both involve the employment of a manager with full discretionary right to decide on the investments undertaken with the sum of money they are assigned.

A mutual fund is a vehicle structured to pool client’s funds together to make an investment collectively, In a fund structure, the client does not possess direct ownership of the the assets purchased by the fund and instead hold mutual fund units. Clients will share all the profit and losses of the investments made, and the expenses incurred for the ongoing administration of the fund. 

As the fund is a pooled investment scheme, it allows managers to combine funds from smaller clients to jointly participate in strategies or investments that oftentimes are viable and available only for larger investment tickets. 

Mutual funds are also aligned to the goals of the fund, whereas managed accounts may be selected to align to a customer’s goal. 

Depending on the investment manager’s offering and setup, and subject to any regulatory considerations, a fund structure is sometimes not necessary or readily available for investors to participate.

Setting up a fund entails high costs, onerous regulatory approvals and compliance, legal and documentation work, which might not be required or cost effective for the managers, depending on the type and scale of their offering. In such scenarios, managers can choose to offer on a private basis to their friends or families, or offer their strategies via third-party regulated and licensed fund-raising platforms.

managed account
Photo by Austin Distel on Unsplash

Wrap Up

Managed accounts are not pooled investments; each investor is the direct owner of their account and underlying assets. 

As the investor might not have the expertise, time, knowledge to invest their funds, they can choose to appoint a manager to trade their account on their behalf.

The investors retain full rights over their funds i.e. only the investor can make the deposit and withdrawal from their account, where they get real-time access to their account balances, P&L and any transactions made, while leaving the investment and trade decisions to the professional to manage on their behalf.

In conclusion, Managed accounts are a simple yet effective way of investing. They provide a solution that brings peace of mind and investment returns without the time and risk needed for self-managed investments.

Contact us at Ortega Capital for more information.

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