What Are Managed Accounts & How Do They Work?

Managed accounts offer a professional approach to investment management, overseen by financial professionals who make investment decisions and manage assets on behalf of clients.

What is a Managed Account?

A managed account is an investment portfolio where a financial professional handles investment decisions and executes trades on behalf of the client, based on an agreed-upon strategy. This differs from a self-directed account, where the investor is solely responsible for all investment choices and trading. Professionals typically have discretionary authority to buy and sell securities within the account without prior approval, provided actions align with the client’s goals and risk tolerance. This allows individuals to benefit from expert management and continuous monitoring without actively managing investments.

While self-directed accounts offer control and potentially lower direct costs, they demand significant time and knowledge. Managed accounts provide convenience by removing the burden of constant research and rebalancing from the investor. Managed accounts generally involve higher minimum investment thresholds compared to self-directed options, with typical starting amounts ranging from $25,000 to $100,000, though some may require six-figure minimums. The professional managing the account operates under a fiduciary duty, meaning they are legally obligated to act in the client’s best interests. This duty helps ensure that investment decisions align with the client’s objectives rather than generating commissions for the advisor.

Different Types of Managed Accounts

Managed accounts come in various forms, each offering distinct features regarding control, customization, and investment structures. Discretionary accounts grant the financial professional authority to make investment decisions and execute trades without explicit client approval, within the agreed-upon investment strategy and risk profile. Conversely, non-discretionary accounts require the client’s explicit approval for every trade. While the advisor can offer recommendations, the ultimate decision-making power remains with the investor, providing a more hands-on approach.

Separately Managed Accounts (SMAs) are individually tailored portfolios where the client directly owns underlying securities like stocks and bonds. This direct ownership allows for customization, including tax-loss harvesting and specific investment exclusions, and offers greater transparency. Unified Managed Accounts (UMAs) combine various investment strategies and asset types into a single account. A UMA can hold different investments, including mutual funds, exchange-traded funds (ETFs), individual stocks, bonds, and even SMAs, within distinct segments. This structure simplifies portfolio management by consolidating multiple investment types, providing a comprehensive overview, and enabling integrated tax planning and rebalancing.

Robo-advisors use algorithms and automated platforms for investment management. These services create and manage diversified portfolios based on an investor’s risk tolerance and goals, often using low-cost ETFs. Robo-advisors generally feature lower fees and minimum investment requirements than traditional accounts, making them accessible to more investors. While primarily automated, some robo-advisor platforms offer hybrid models with access to human financial advisors for personalized guidance.

The Process of Opening and Managing an Account

Establishing a managed account involves a structured process, beginning with understanding the client’s financial situation and continuing with ongoing portfolio oversight. This ensures the investment strategy aligns with individual objectives and adapts to changing circumstances.

Initial Information Gathering and Goal Setting

Opening a managed account begins with comprehensive information gathering between the client and financial professional. Clients provide detailed financial information, including income, assets, and liabilities, to help the advisor understand their economic standing. Clients articulate investment goals, from retirement planning to saving for a home. Determining risk tolerance, assessing comfort with potential fluctuations, is equally important. The investment time horizon also shapes the strategy.

Financial institutions are subject to regulatory requirements, including Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. KYC procedures verify client identity and financial activities to prevent illicit transactions, typically requiring identification and proof of address. AML regulations combat financial crimes, with KYC as a core component. This information helps the professional craft a personalized investment strategy aligned with the client’s goals, risk tolerance, and time horizon.

Ongoing Management and Communication

After initial setup, the financial professional implements the investment strategy by purchasing specific investments like stocks, bonds, or ETFs, to construct the portfolio. The professional continuously monitors performance and market conditions. If market movements cause deviations from the target allocation, the advisor performs rebalancing, adjusting the portfolio back to its intended proportions. This systematic review ensures the portfolio stays aligned with the client’s risk profile and goals.

Clients receive regular performance reports, typically quarterly, detailing account performance, holdings, and transactions. These reports offer transparency and allow clients to track progress. Communication between the client and advisor is ongoing, often involving regular meetings or calls to discuss market updates, review performance, and make any necessary adjustments to the strategy based on life changes or evolving financial goals.

Fee Structures for Managed Accounts

Financial professionals charge for managing accounts through various fee structures, compensating them for their expertise and ongoing investment management. Understanding these models helps investors assess the total cost.

A common fee structure is the Assets Under Management (AUM) fee, where the advisor charges an annual percentage of the total value of managed assets. This fee typically ranges from 0.25% to 1.5% annually, often deducted quarterly. The dollar amount of the fee increases as the portfolio grows and decreases if its value declines.

Some advisors may charge flat fees, which are fixed annual or monthly amounts regardless of the assets under management. This structure can be advantageous for clients with larger portfolios, as a percentage-based fee might become significantly higher. Flat fees provide transparency and predictability, as the client knows the exact cost each year.

Commissions are less common in pure managed account models that primarily use AUM fees, but may be present in certain arrangements or for specific product transactions. The AUM fee generally covers advisory services and trading costs, often in lieu of per-transaction commissions. Performance fees tie the advisor’s compensation to the account’s investment performance, such as a percentage of returns exceeding a benchmark. This model aligns incentives with client success but can introduce fee variability. Regardless of structure, these fees are calculated and deducted from the client’s account for professional investment management.