Managed Account

Definition

A managed account is an investment account which holds the money of one or more clients that is managed by a professional investment manager. The manager makes strategic decisions on behalf of the clients, including when and where to invest the funds. This type of account can be administered by a bank trust department or an independent investment advisory firm. The goal is to maximize the return on investment while managing risk and aligning with the investment objectives of the account holders.

Example

Suppose a client named Jane opens a managed account with an investment advisory firm. Jane deposits $500,000 into the account. The investment manager takes control of this amount and decides to allocate it into various stocks, bonds, and other securities based on market research and the client’s investment goals. The manager actively adjusts these investments to respond to market conditions and to optimize Jane’s returns while reducing risks.

Frequently Asked Questions (FAQs)

What are the benefits of a managed account?

Managed accounts offer personalized investment portfolios tailored to the individual investor’s goals, risk tolerance, and financial situation. Professional management can provide strategic investment choices and continuous monitoring.

Are managed accounts suitable for everyone?

Managed accounts are typically best suited for high-net-worth individuals looking for a more hands-on management approach. However, the fees associated with managed accounts may not be justified for smaller portfolios.

How are managed accounts different from mutual funds?

Unlike mutual funds where investors pool money together and share in the profits or losses proportionately, managed accounts are individually owned investment accounts managed to meet the unique financial needs and goals of the account holder.

What are the costs associated with managed accounts?

Costs typically include management fees, which are a percentage of the assets under management (AUM), as well as potentially other fees for transactions, performance incentives, or administrative costs.

How do I choose a manager for a managed account?

Selecting a manager involves evaluating their track record, investment philosophy, credentials, and client testimonials. It’s essential to ensure they align with your investment objectives and have a trustworthy reputation.

Advisory Fee: The fee charged by investment managers for managing a managed account, usually expressed as a percentage of assets under management (AUM).
Portfolio Management: The act of managing an investment portfolio by allocating assets, rebalancing it, and strategizing investments to meet specified objectives.
Discretionary Account: A type of managed account where the manager has the authority to make investment decisions without prior client consent for each transaction.
Custodial Account: An account where investments are held and safeguarded by a third-party custodian but managed by the investment adviser.

Online References

Suggested Books for Further Studies

“The Intelligent Investor” by Benjamin Graham - A classic in the investment community, covering essential principles and strategies.
“A Random Walk Down Wall Street” by Burton G. Malkiel - Provides insight into various investment strategies including those relevant to managed accounts.
“Fundamentals of Investment Management” by Geoffrey A. Hirt and Stanley B. Block - An in-depth exploration of investment management theories and practices.

Fundamentals of Managed Account: Finance Basics Quiz

### What is a managed account? - [ ] An account where clients trade on their own. - [x] An investment account managed by a professional. - [ ] A savings account with high interest. - [ ] An account used for tax purposes only. > **Explanation:** A managed account is an investment account professionally managed by an investment manager or advisory firm, making investment decisions on behalf of the clients. ### Who typically oversees a managed account? - [x] A professional investment manager - [ ] The account holder themselves - [ ] A governmental body - [ ] A lawyer > **Explanation:** Managed accounts are overseen by professional investment managers who make strategic investment decisions. ### What type of fees are commonly associated with managed accounts? - [ ] Withdrawal fees - [ ] Insurance fees - [ ] Late payment fees - [x] Management fees > **Explanation:** Managed accounts primarily have management fees, which are a percentage of the assets under management. ### How does a managed account differ from a mutual fund? - [x] It is managed individually for one client's investment goals. - [ ] All investments are pooled together. - [ ] It only invests in stocks. - [ ] It is less risky than a mutual fund. > **Explanation:** Unlike mutual funds, managed accounts are individually managed to meet one client's unique investment goals. ### Can managed account holders make direct investment decisions? - [ ] Yes, they are required to. - [ ] Yes, they have to approve every transaction. - [x] No, the manager makes the decisions. - [ ] Sometimes, depending on the firm. > **Explanation:** In a managed account, investment decisions are typically made by the investment manager without requiring prior approval for each transaction. ### What is the primary advantage of a managed account? - [ ] Lower fees - [ ] Guaranteed returns - [ ] No risk - [x] Personalized investment strategy > **Explanation:** The primary advantage of a managed account is the personalized investment strategy tailored to the client's financial goals and risk tolerance. ### What type of clients generally opt for managed accounts? - [x] High-net-worth individuals - [ ] Small savers - [ ] Only corporate clients - [ ] People looking for tax shelters > **Explanation:** High-net-worth individuals generally opt for managed accounts because of the personalized and professional management they offer. ### In what scenario might a managed account not be suitable? - [ ] For someone with a large portfolio. - [x] For someone with a small budget. - [ ] For someone looking for professional advice. - [ ] For someone looking for personalized strategies. > **Explanation:** Managed accounts often come with higher fees, which may not be justifiable for individuals with smaller portfolios and budgets. ### What is a discretionary account? - [ ] An account with no rules. - [x] A type of managed account where the manager has full control over investment decisions. - [ ] An account managed by clients. - [ ] An account only for businesses. > **Explanation:** A discretionary account is a type of managed account where the investment manager has full discretion and authority to make investment decisions without needing prior client approval. ### What could be a potential disadvantage of managed accounts? - [ ] Very low returns - [ ] No management expertise - [x] Higher management fees - [ ] Lack of portfolio growth > **Explanation:** Managed accounts often come with higher management fees, which could potentially reduce overall net returns.

Thank you for exploring our detailed breakdown of managed accounts and engaging with our challenging quiz questions. Continue honing your financial literacy for greater investment success!