What it means
The defining feature of a managed account is the separation between ownership and control. The cash and securities sit in an account in the investor's own name, while a discretionary manager makes the buy and sell decisions under an agreed mandate.
That mandate sets the objectives, the permitted investments and any restrictions. This differs from a fund in an important way.
In a fund your money is mixed with everyone else's and you own units; in a managed account you own the underlying shares and bonds directly, which gives you sight of every holding and the ability to exclude specific ones. Your tax position is also your own rather than inherited from other investors' trading.
Businesses meet managed accounts most often through treasury and pension arrangements. A company sitting on surplus cash may hand a portion to a manager under a conservative mandate, and trustees of a pension scheme frequently appoint separate managers for different asset classes.
The same structure is offered to wealthy individuals under the name separately managed account. Fees are the part most people underestimate.
The headline management fee is typically charged quarterly on the average value of the account, and on top of it sit trading costs, custody charges and sometimes a performance fee. Because the fee is deducted every year, a difference of half a percentage point compounds into a large sum over a decade.
Discretion is the other thing to understand clearly. Once you sign a discretionary mandate the manager can trade without asking you first, so the mandate document, not a phone call, is where you set the boundaries.
Advisory accounts, by contrast, require your approval on each trade and usually carry a lower fee.
In practice
Real-world examples.
Example
A manufacturing company holds $4,000,000 of surplus cash it will not need for two years. It appoints a manager under a mandate limited to government bonds and investment grade paper with a maximum maturity of 24 months, rather than buying securities itself.
Example
A charity's investment committee moves from three pooled funds to a managed account so it can exclude tobacco and weapons holdings directly. Direct ownership of the securities is the only structure that lets the trustees apply their own exclusion list.
Example
A retiring business owner places sale proceeds of $2,100,000 into a separately managed account with a balanced mandate. Because the securities are held in her name, her adviser can realise losses selectively to manage her tax position each year.
Formula
Calculation
Annual management fee = account value x fee rate
Net return = gross return - fees
An investor places $850,000 into a managed account under a mandate charging 1.10% a year, billed quarterly.
Annual fee = $850,000 x 1.10% = $9,350, which is $9,350 / 4 = $2,337.50 a quarter.
Over the year the portfolio produces a gross return of 7.4%, which is $850,000 x 7.4% = $62,900.
Net gain = $62,900 - $9,350 = $53,550, a net return of $53,550 / $850,000 = 6.3%.
The fee has taken 7.4% - 6.3% = 1.1 percentage points off the gross return, but expressed against the gain rather than the balance it is $9,350 / $62,900 = 14.9% of everything the portfolio earned. Comparing that with a competing mandate at 0.70% is worth doing: the fee would be $850,000 x 0.70% = $5,950, saving $9,350 - $5,950 = $3,400 in a single year.Case study
Seen in the real world.
The following is an illustrative example featuring a fictional firm. Halewood Engineering had built up $3,600,000 of cash after selling a division and placed it with a manager on a 1.25% mandate described simply as balanced growth.
Two years later the finance director reviewed the arrangement and found three things. The mandate permitted holdings that the board would never have approved, the fee had cost $3,600,000 x 1.25% x 2 = $90,000 over the period, and roughly a quarter of the account sat in cash earning very little while still attracting the full fee.
In this fictional case the company renegotiated to 0.85% on a narrower mandate and excluded uninvested cash from the fee base. The lesson was not that the manager had behaved badly, but that nobody had read the mandate carefully enough when it was signed.
Watch out
Common mistakes.
- Assuming a managed account is the same as a fund, when the investor owns the underlying securities directly rather than units in a pool.
- Focusing only on the headline management fee and ignoring custody charges, trading costs and any performance fee sitting behind it.
- Signing a discretionary mandate without reading the permitted investments, then being surprised at holdings the manager was fully entitled to buy.
Questions
People also ask.
What is the difference between discretionary and advisory management?
A discretionary manager trades without asking you first, while an advisory manager recommends trades that you must approve individually.
Is a managed account safer than a fund?
Not inherently, because safety comes from the mandate and the investments chosen, though direct ownership does give you clearer visibility and control over exclusions.
What size of portfolio does a managed account need?
Providers usually set minimums because the structure carries fixed administration costs, and those minimums commonly start in the low hundreds of thousands of dollars.
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