Managed Account vs Mutual Fund: Key Differences Explained

Home Investing What Is a Managed Account and How Is It Different From a Mutual Fund?

What Is a Managed Account and How Is It Different From a Mutual Fund?

You’ve got $150,000 invested, half of that is in your employer stock and you’re advised to transfer all of it to a managed account. The pitch is quite appealing: professional decisions, personal tax planning, less work for you. After that you’ll see the fee. There are a few things you should know before signing up: what you will be buying, what the manager will have, and whether the additional service is worth the cost.

A Managed Account Is a Real Account

A managed account is one investor’s account but is professionally managed pursuant to a strategy agreed to between the investor and the professional. Portfolio manager may purchase or sell investments without seeking approval prior to each trade, as long as the purchase and sale is within the limits of the account agreement.

This includes wrap fee programs and direct-indexing and separately managed accounts. Management, brokerage and administration could be wrapped together in a wrap program. There are some trades that may still come with an added cost in that package, warns the SEC.

A managed account must be part of an overall investment plan, not the investment plan instead.

You Don’t Own Shares in a Pool, You Own the Investments

The only difference is who owns the property. Managed accounts typically consist of individual securities held in an account that are yours. A mutual fund is a fund where the money you put in is combined with the money of other investors and where you buy shares in the fund and NOT each stock or bond within the fund.

Assume that you have a $200,000 managed account with 35 stocks and 10 bonds. Those positions will be displayed on your account. Place the same amount in a mutual fund, and you will see the number of fund shares in your statement.

Ownership can provide greater flexibility and control over tax planning and charitable giving. It doesn’t imply that you may make the manager purchase whatever you desire. There are some programs that allow restrictions, and others that allow wide discretion to the manager.

It will make the account statement a lot less mysterious if you understand what a stock actually is if the portfolio includes individual stocks.

The Focus Is on Customization as the Selling Point

The focus is on customization as the selling point. The accent is on customization as the selling point.

A mutual fund’s strategy is the same for all investors. When you have a company you don’t like in your piece, you can never get rid of that company. The options are to take the portfolio or sell the fund.

The separately managed account might allow the manager to exclude a company or decrease an industry or group of investments that you already have. Imagine that $300,000 of your $600,000 portfolio is employer stock. The total sale bill may be huge if sold off in one fell swoop. The other $300,000 the manager can be spent to lower exposure to that industry and incrementally buy down those shares.

They have a cost to customization. A change in the number of large companies in an index style strategy can cause returns to vary substantially from the index. Safety and quality are not necessarily synonymous with personal.

The manager will still have to link each restriction to your set of financial objectives and not make them costly bets based on your preferences.

Managed Account Fees

One of the most cost-efficient ways to gnaw away at the benefit are managed account fees.

Managed accounts typically charge a percentage of assets. A 1% annual fee on $250,000 costs $2,500. The same balance in a mutual fund with a 0.15% expense ratio would cost approximately $375, excluding separate charges by the adviser and/or the account.

This $2,125 per year deficit adds up. With both portfolios generating a 7% return before fees for 20 years, the lower cost portfolio would end up about $139,000 ahead. The managed account needs to generate sufficient return to compensate for the deviation.

Don’t take one of the quoted percentages for granted. This can be on top of custody fees, fund expenses, platform fees, and external trading costs. The SEC states that Form ADV should make clear how the adviser is paid, include a fee schedule and would disclose whether any fees are negotiable.

Mutual funds don’t come with a price tag either. In the table of Prospectus expenses, their fee, also known as an expense ratio, is listed. Some also levy sales loads or account fees.

Tax Control Is of Utmost Importance in a Taxable Account

You own the positions in a managed account, thus making security-by-security tax decisions. Assume the stock loses $8,000 and the other gains $12,000. If sold both, net realized gain would be $4,000 (before other transactions and tax rules are taken into account).

It applies to a lot of stocks and is called direct indexing. The idea behind the portfolio is that it will look like an index, and the manager may sell some of the losses and replace them with similar securities to keep the exposure similar. The benefit may be useful if you have gains elsewhere but it does not necessarily mean that it will grow, and it can be reduced over time.

Wash sale rules make it more complicated. The IRS will typically not allow a loss if the substantially identical securities are purchased within 30 days before or after the day of the loss sale. Buys in other accounts can disrupt the manager’s plan.

Even with professional trading, dividend income and realised gains are still subjects to taxes.

Minimum Investments and When a Managed Account Makes Sense

In the investment industry, there is a distinction between the useful and the unnecessary, and it involves the amount of money you invest.

While some managed account minimums have been reduced by technology, the managed account programs available today are still quite different. Some begin around $25,000, while others require $100,000, $250,000, or $300,000.

Higher is no guarantee of better. It could be just a tactic or the clientele the firm desires.

It’s a case of the wrong solution to the right problem if you don’t have emergency savings and invest $30,000 in a custom-made stock portfolio. For someone with a $1 million taxable account, a large employer-stock position, and regular capital gains, the tax and customization features might be worth a good look.

Managed account can grow your net worth, but ‘managed account’ does not create anything.

If a Mutual Fund Is the Better Option

Mutual funds offer a joint entry into a pre-made portfolio. A single purchase can give exposure to hundreds of securities, and it may require less of paperwork.

Saving $500 a month into a diversified mutual fund is easily automated. You don’t need to comb through 80 positions, monitor dozens of tax-lot transactions, or just figure out why one company that didn’t appear on the list moved a dollar away from the benchmark.

The trade-off is less control. There are no personalised holdings and capital-gain distributions that are generated by the fund manager’s trading for the investor who is a taxable investor. Investor.gov states that passive mutual funds tend to be less traded and may have lower fees than active ones.

A low-cost fund in bad markets will win out over a complicated account that’s left after a single year of poor performance for many.

Always Check With the Manager Before Moving Your Money

Professional management doesn’t mean good performance. A manager might miss the mark in terms of performance, overtrading, misunderstanding your tax situation, and selecting a plan that’s not right for you.

Read Form ADV and Relationship Summary. Review the total fee, conflicts, disciplinary history, benchmark, withdrawal terms, and if securities can be transferred out without selling it. According to Investor.gov, Form ADV is the “adviser’s disclosure form”.

Request performance post all fees. The personal service wasn’t sufficient to close the 2 percent spread when compared to the benchmark’s rate of 10 percent. Also ask about frequency of trading and if the tax is handled in a similar fashion to any other investments they may have.

The Bottom Line

A managed account provides professional management, direct ownership and greater tax planning possibilities than a mutual fund. This is a good option for a huge, complex taxable portfolio. It can also be a costly solution to a problem that is already being solved by a low cost fund. Before you decide, make sure to compare the all-in fee, after-tax benefit, benchmark, and minimum investment.

Frequently Asked Questions

Which is better, a managed account or a mutual fund?

Not automatically. A managed account will be more customisable and more tax controlled, and a mutual fund will typically be less expensive and more straightforward to own.

How much money in a managed account?

Minimum requirements from provider to provider and plan to plan. Some start as low as $25,000, and some separately managed accounts are more specialized and can be $100,000 to $300,000 or more.