Managed Trading Accounts
Managed trading accounts are a hands-off way for traders and investors to manage their money and securities. Individuals give control to an investment manager that will buy or sell securities and assets with an investor’s specific goals, risk tolerance and financial position in mind. Conversely, unmanaged accounts require you, the investor, to take action.
In this 2023 guide, we will explain what they are, how they work, the pros and cons of investing in managed trading accounts and how best to compare them.
Managed Trading Accounts Explained
Managed trading accounts, or separately managed accounts (SMAs), are investment accounts that are owned by an investor but managed by an advisor, team of advisors or robo advisor at a professional investment firm. Also known as wrap accounts, these can bundle investments together for you. By definition, these are not the same as managed bank accounts, which are consumer banking products in the UK.
The financial advisor has discretionary authority over the managed money account and its trading activity on behalf of the investor. Managed trading accounts merely consider the objectives of the account holder, be that an institutional or retail investor. Participants must provide this information so the advisor can tailor the investments, making them preferred QDIA (Qualified Default Investment Alternative) choices.
Such accounts may contain financial assets, cash or real estate title documents. A managed account brokerage can provide a variety of services to investors like retirement plans (including 401k plans for retirees), 529 college savings plans, research, financial advice and tax efficiency & planning.
Managed trading accounts are popular with high-net-worth individuals as they tend to be expensive and require a large minimum amount of investment. Recent innovations are robo advisors like Betterment or Wealthfront. Robo advisors are digital platforms that provide automated account management with little to no human input. These platforms are typically cheaper and use machine learning to produce and follow growth trends.
How Managed Trading Accounts Work
The dedicated money manager has the authority to buy and/or sell assets without the account owner’s approval. They will make decisions based on the investor’s risk appetite, capital and financial goals. Managed trading accounts involve fiduciary duty, meaning the manager must act in the investor’s best interests or potentially risk facing criminal penalties and lawsuits. The investment manager will provide the client with a report on their account, including its performance and holdings.
This high level of customisation is one of the managed trading accounts’ greatest selling points, especially when it comes to taxable accounts. For example, investors can specify that they only want to invest in socially responsible portfolios.
Advisors or managed account providers can demand high minimum investments to manage accounts with many starting at $100,000. Managers are also compensated by a fee, often calculated as a percentage of assets under management (AUM).
There are many benefits to investing in managed trading accounts, including:
- Hands-off approach
- Tailored personal advice
- Investors have maximum transparency and control over assets
- Tax gain/loss harvesting (minimising capital gains tax liability)
- Responsible for account holder’s risk tolerance and financial goals
Equally, it is important to consider that separately managed accounts have their disadvantages:
- Some require a six-figure minimum in funds
- More of a long-term investment strategy
- High annual fees
How To Compare Managed Trading Accounts
There are various factors to consider when comparing managed trading accounts and the investment firms providing them. The investment process i.e., understanding who makes decisions, how they are implemented and the money manager’s performance data, investment philosophy and approach are key.
As well as doing your research into the organisation of a firm and its compliance history, here are some things to consider when comparing options:
Minimum investments are generally quite high for managed accounts. If you have less capital to spare, AI-based robo advisor accounts tend to have lower limits.
Fee structures among investment advisors will vary. Managed trading accounts are rarely a cheap option as you are essentially paying a skilled money manager to make your investment decisions for you. Managers are compensated by an annual fee. These can vary considerably but most average around 1% to 3%. Often, investment managers offer discounts on larger investments. These smaller fees may have taxation benefits.
It is worth considering the impact that fees will have on your returns. Ultimately, the higher the charges in a separately managed account, the lower the return it will yield. Generally, it is advised to limit total fees, including manager’s rates, trading costs and fund fees to 2%. Robo advisor account management fees are often cheaper, at around 0.25% AUM and can require as little as $5 to start.
Some money managers have extensive in-house trading platforms, while other providers outsource their non-core functions to third-party providers like Schwab or Fidelity. Other firms like E*TRADE provide their managed account platform via an app, making it easier to use and track online. This more automated approach, similar to JP Morgan’s recent robo advisor offering, brings costs down and our reviews show that E*TRADE has a low minimum investment of $500.
Make sure that the managed account that you choose has good customer service. The benefit of paying for a professional financial advisor that manages your account is that it is tailored to you and you can receive updates. If you are not getting the customer support you need, you might as well pay much less for a robo advisor that has no human component either!
Managed trading accounts are usually provided by professional investment firms. In the US, most of these investment advisors operate under the license and regulation of the US Securities and Exchange Commission (SEC). In Australia, they are regulated and registered with the Australian Securities and Investments Commission (ASIC).
Funds or companies in the European Economic Area (EEA), such as private equity funds, investment funds and any other alternative investment funds, also need to consider the risk management obligations under European Markets Infrastructure Regulation (EMIR).
Information and data presented in a user-friendly manner is always a key factor to consider. If you cannot understand any of the reports or information provided to you, how can you tell whether you are making money and how close to your goals you are?
ManagedTrading Accounts Vs Mutual Funds & Index Funds
Mutual funds are technically a type of managed account. They are both actively managed portfolios but mutual funds are open to anyone with the means to buy shares in a fund rather than customised for a specific investor in the way that separately managed accounts are.
Mutual funds are not tailored to one investor’s individual objectives but the managed fund’s investment and return objectives. Similarly, investors purchasing shares of a mutual fund own a percentage of the value of the fund, not the fund or assets in the fund themselves. In the case of managed accounts for trading, the account holder owns the securities directly.
With managed funds, you share costs with a pool of investors reducing the overall cost. However, most of the funds on offer are open, meaning that you and anyone else can invest money with them.
Similar to mutual funds, managed ETF accounts use exchange-traded funds as their investment vehicle. ETFs have lower expense ratios compared to mutual funds and therefore have a greater appeal to investors that are more cautious with their money.
Index funds try to match the performance of a specific market benchmark, whereas an actively managed fund tries to outperform it. Index funds align strategy and risk for those involved with specific stocks or bonds.
Managed Forex & CFD Accounts
Having a managed forex or CFD trading account has become increasingly popular among the investment community. A managed forex account is where a professional money manager manages foreign exchange trading on the client’s behalf. As forex is notoriously riskier, many people believe that having a more experienced money manager could give good results and better returns.
Managed forex, crypto, CFD and other short term trading accounts are often referred to as multi-account management systems or MAM accounts. These accounts tend to have an experienced, often professional, day trader that specialises in specific securities at the helm. These managers will themselves have stakes in their performance, pooling their capital with that of their investors to open positions and carry out advanced strategies, so they benefit from doing well for their clients.
These managed trading accounts can then be divided into two subcategories, PAMM and LAMM accounts. Lot allocation management modules (LAMM accounts) entail matching the manager’s positions lot-for-lot for each investor, so one lot of USD purchased by the manager would result in one lot being purchased by each investor.
However, in cases where the equities of each investor outpace those of the manager, this system becomes less effective. Thus, the percentage allocation management module (PAMM account) was born. In this system, each investor will assign a percentage of their capital to the pool of funds for the manager to invest, better scaling the system to their net worth.
The minimum investment for a managed forex account can be a bit lower too. For example, Learn2Trade’s minimum is $5,000. eToro populates a list of forex traders that meet your set criteria and you can choose from them to manage your money.
Final Word On Managed Trading Accounts
Managed trading accounts can offer traders a more hands-off approach to investing, alongside tax benefits and flexibility that few manual investment platforms can offer. However, these accounts come with a price, as investors generally need to have a high minimum account level, though cheaper options are often provided by robo advisors. When comparing providers of managed trading accounts, it is important to consider customer support, interfaces and fees, ensuring they are in line with your requirements.
Are Managed Trading Accounts Worth The Fees?
Managed trading accounts allow investors to hand over their capital to more skilled financial advisors that will tailor the holder’s account to their financial goals. Separately managed accounts (SMAs) can be a good option for higher net worth investors that can afford to invest large amounts in their portfolios. For those that do not have as much capital to invest with human financial advisors, robo advisors also offer managed investment services for less. However, these accounts have not been found to regularly beat the market and returns can be below average due to the fees incurred.
Should I Choose A Managed 401k Account Or A TDF?
Target-date funds (TDFs) are asset allocation portfolios named by the year in which the investor plans to retire or use the assets. The mix of asset classes and degree of risk becomes more conservative as the target year approaches. Conversely, the customisation of 401(k) separately managed accounts is a draw as it is developed to an investor’s specifications in terms of goals, risk tolerance and overall financial position. TDFs do not consider these. Managed investment accounts tend to have higher savings rates and investment returns than TDFs alone.
Does Fidelity Offer Managed Trading Accounts?
Investment firms like Fidelity, Charles Schwab and Vanguard all offer managed trading accounts with minimal fees and zero commissions on stocks, ETFs and options. Managed accounts at Fidelity are known as discretionary investment management services.
Can I Find Managed Trading Accounts Outside The US And UK?
Yes. In Australia, the ASX offers managed funds and both CFS and Macquarie offer managed investment accounts. In Canada, Franklin Templeton offers managed investment accounts.
Which Financial Advisors Offer Managed Trading Accounts?
In the US and UK, the following firms offer managed trading accounts: Interactive Brokers, E*TRADE, TD Ameritrade, Questrade, Vanguard, Atlassian, BlackRock, BB&T, Cerulli, Edward Jones, Empower, JBWere, JP Morgan, Juilliard, KeyBank, Morgan Stanley, Morningstar, Nationwide NetWealth, NextCapital, Nuveen, Pershing, Quilla, T Rowe Price, TIAA, UBS, XPlore Wealth, Zacks and Zenith.