How Online Brokerage Accounts Differ From Managed Accounts
Understand the fundamental differences between managing your own investments and professional portfolio management to make informed financial decisions.
A brokerage account allows individuals to hold and trade various investments, such as stocks, bonds, and mutual funds. These accounts provide the platform for engaging with financial markets. While both online and managed brokerage accounts facilitate investment activity, they operate under different models regarding decision-making, service provision, and investor involvement. This article explores the distinct ways these two account types function in the investment landscape.
Investment Decision-Making and Control
The primary distinction between online and managed brokerage accounts lies in who holds the authority for investment decisions and the level of direct control an investor maintains. With an online brokerage account, the account holder assumes complete responsibility for all investment choices. This includes researching potential investments, selecting specific assets to buy or sell, and executing trades independently. This approach provides a high degree of autonomy.
Conversely, managed brokerage accounts involve a professional financial advisor or firm making investment decisions. While the investor establishes their overall financial goals and risk tolerance with the advisor, the day-to-day management and selection of specific investments are delegated. The advisor often operates with discretionary authority, meaning they can execute trades without seeking prior approval for each transaction, based on the agreed-upon investment strategy.
Range of Services and Support
The scope of services and support offered by online and managed brokerage accounts varies considerably. Online brokerage accounts provide self-service tools. These resources often include access to research reports, real-time market data, charting capabilities, and educational materials. Basic customer support is usually available through online channels or phone, focusing on platform navigation and transactional inquiries.
Managed brokerage accounts offer more comprehensive and personalized services. These can encompass tailored financial planning, including retirement planning, college savings strategies, and estate planning considerations. Advisors often provide ongoing portfolio rebalancing, tax optimization strategies, and in-depth performance reporting. Regular communication with a dedicated financial advisor is a hallmark of managed accounts, offering an integrated approach to an individual’s financial picture.
Fee Structures and Costs
The methods by which fees are assessed differ significantly between online and managed brokerage accounts. For online brokerage accounts, costs are often transactional or tied to specific services. Many online brokers offer commission-free trading for stocks and exchange-traded funds (ETFs). However, fees may apply for options contracts. Mutual funds might incur transaction fees, and investors also bear the underlying expense ratios of mutual funds and ETFs. Additional charges can include margin interest or subscription fees for premium research tools.
Managed brokerage accounts primarily utilize an assets under management (AUM) fee model. This means the advisor charges a percentage of the total assets they manage for the client annually. This percentage can range from 0.25% to 2%, with the median AUM fee often around 1% per year. This AUM fee typically covers all advisory services, including portfolio management and ongoing financial planning. Some advisors may also charge flat fees for specific services or an hourly rate.
Investor Role and Responsibilities
The level of active involvement and responsibility required from the investor varies substantially between the two account types. With an online brokerage account, the investor undertakes a significant role in managing their investments. This includes conducting their own due diligence, understanding market dynamics, and actively monitoring portfolio performance. Investors are also responsible for managing the tax implications of their trading activity. This self-directed approach demands continuous engagement with their investments.
In a managed brokerage account, the investor’s role shifts towards oversight and communication. While the financial advisor handles the operational and analytical tasks, the investor remains responsible for clearly articulating their financial goals, risk tolerance, and any significant life changes. Investors are also expected to review performance reports provided by their advisor and communicate any concerns or adjustments needed. This model allows for a more hands-off approach, delegating the complexities of active portfolio management to a professional.