What is a managed account?

When it comes to investing, you may be someone who either knows what they're doing or enjoys the experience of learning how the market works—or you may want to leave it up to the professionals.

If you align with the "up to the professionals" option, you may want to try a managed account. This option puts experienced investment managers in charge of your portfolio. They regularly make trading decisions on your behalf in an attempt to meet your long-term objectives.

Managed investment accounts are overseen by a portfolio manager who could be a financial advisor, a wealth manager or an asset management team that invests your money in a diverse mix of securities—typically mutual funds and exchange-traded funds (ETFs). For a fee, these managers handle the account for you. They have a fiduciary duty to act in your best interests based on the intent of your investment. Managed accounts are advisory products, meaning part of the fee you pay is for ongoing advice specific to your situation.

Companies that provide managed accounts may factor in:

• Your risk tolerance, ranging from conservative to aggressive
• Your investment goals, including the purpose and timeline of your investment
• Your preferred type of holdings, based on aspects like social responsibility or faith forward investments
• Your preferred management style, such as active vs. passive investing
• Your tax sensitivity, if using a taxable account

A portfolio manager's goal is to stay true to the long-term orientation of the model you select. If you select a more conservative portfolio, for instance, they may aim for a steady allocation of bonds and dividend-paying stocks instead of high-risk stocks. That way, the overall portfolio risk stays low regardless of market conditions.

At the same time, the manager likely will use other short-term trading strategies in an attempt to generate above-average returns in a rising market or preserve capital in a declining market. They often interpret technical factors like asset pricing trends, company fundamentals and industry trends to make these decisions on your behalf.

Managed accounts are run by investment professionals with demonstrated skills in key areas, such as:

• Financial analysis—the ability to assess company financials, market trends and economic indicators
• Investment strategy—the capacity to develop strategies consistent with the client's objectives
• Risk management—an understanding of various risks, including market risk and interest rate risk, to preserve the client's wealth
• Performance measurement—proficiency in evaluating how the account has performed relative to peer portfolios or market indexes

Portfolio managers have specific industry certifications that demonstrate their command of these areas. These may include designations like Chartered Financial Analyst (CFA) and CERTIFIED FINANCIAL PLANNER™ (CFP™).

Choosing a managed account vs. brokerage account is an important decision. A regular brokerage account is self-directed; you may choose assistance of your financial advisor. You—the owner—decide what securities to buy and sell. However, using a managed account provides several potential advantages:

• Expert management. When you invest through a managed account, a professional with expertise in navigating financial markets guides your portfolio. They often have extensive industry experience and access to updated research and analysis.
• Active monitoring. Professional portfolio managers can assess market activity in real time, allowing them to take advantage of investment opportunities the average investor may not realize. Managers routinely rebalance the holdings to ensure the overall portfolio aligns with your goals.
• Data-driven decision-making. Everyday investors sometimes react emotionally when significant movements occur in the market. However, impulsive decisions often do more harm than good in the long run. Having a third party manage your portfolio means trades tend to be based on data rather than feelings.
• Access to institutional-quality investments. Managed accounts come with access to investment products that aren't available to individual investors. Depending on where you open your account, the portfolio manager may be able to use private equity offerings or other advanced strategies to try to either increase your return or limit your risk.
• Tax efficiency. The ability to minimize the effect of taxes on your investments can dramatically improve your net returns. Portfolio managers understand the complex tax treatment of different asset classes and develop strategies that allow you to keep more of what you earn.
  

Deciding if managed accounts are right for you

Working with a financial advisor can give you an edge in understanding your big picture, building your sense of purpose and guiding you through life changes.


Reasons to work with a financial advisor

While having a professional team run your investment account offers important benefits, managed accounts can have drawbacks. When deciding if they're a fit for you, factor in that you'll likely have:

• Little direct control. When you open a managed account, you're handing over the reins to someone else to make the investment decisions. If you want more input than setting general guidelines or prefer to be more hands-on, a self-directed account may be a better fit.
• Discretionary versus non-discretionary. If the portfolio manager has discretion, they are able to trade the account without having to check with you first. If the manager does not have discretion, you must approve all trades before they can be executed.
• Higher account fees. Managed accounts typically involve paying either a flat fee or a percentage of your managed assets. This is in addition to owing any expenses for the underlying investments, which you also would pay if you invested in those funds directly on your own.
• Minimum investment amounts. The base amount you need to invest in a managed account is generally higher than a self-directed account. The threshold varies among companies, but minimum investments of $25,000-$100,000 are typical.

Managed accounts aren't the only way or always the best way to invest. Aside from doing it yourself, you may opt to use a robo-advisor or use a target date fund to control the destiny of your assets.

Here's how managed accounts stack up against other approaches:

A self-directed account is simply an investment where you choose the securities—whether they're stocks, bonds, funds or other assets—on your own. One of the benefits of the do-it-yourself approach is that you don't pay account management fees (though you still incur commissions or expenses related to the investments you select). However, if you're not confident in your ability to build a diversified asset mix and regularly rebalance it on your own, a managed investment account may be worth it.

As with managed accounts, robo-advisors help you build and monitor your portfolio. The key difference is the level of human involvement. A robo-advisor uses artificial intelligence (AI) and algorithms to create and manage your portfolio. Decisions still are based on your risk tolerance and investment horizon, but are calculated by a computer program that analyzes market conditions.

You often can invest smaller amounts of money with a robo-advisor, and the fees can be lower than managed accounts. But there's a difference in getting generalized investment guidance from AI and having a human use not just data but intuition, perceptions and experience to make strategic choices based on your individual goals.

A target date fund is a basket of mutual funds or ETFs where the fund's asset allocation is adjusted to be more conservative the closer you get to the target year. It's a set-it-and-forget-it investment that's usually selected with a retirement year in mind. It can be an attractive choice if you don't want to manage a portfolio yourself and are OK with one that's generalized for a wide group of people based solely on the year you plan to begin withdrawing money.

Developing a portfolio on your own can be a low-cost option that gives you the greatest control over your investments. However, letting an expert build and manage your assets and provide ongoing advice can ensure your investment strategy adapts to changing markets and changes in your personal situation.

If you decide to open a managed account, be sure to explore the company's range of options to ensure they reflect your investment goals. If you have specific preferences—such as a socially responsible or faith-based investment strategy—look for providers who offer those choices. In addition, you'll want to stick with companies that have a strong track record and charge competitive fees.

Whether you're saving for retirement or other financial needs down the road, putting together the right portfolio is crucial. A Thrivent financial advisor can help you assess your financial goals and determine whether a managed account is the right solution for you.