Traditionally, institutional investors used a money manager to run a portion of the institution's money and make all the investment decisions. Until recently, individual investors could only get access to these managers if they had millions of dollars to invest.
But in recent years, the minimum investment requirements - and, just as importantly, costs - have come way down.
When you open a managed account, it means you have signed a limited power of attorney to let an investment professional run your portfolio or some portion of it. Generally speaking, the manager will begin by determining your investment goals, time horizon and risk tolerance. A 70-year-old widow's portfolio, for example, may look very different than a 25-year old couple's.
Here are the benefits of a professionally managed account:
1. Custom asset allocation. The portfolio is based on your personal investment goals, not a general strategy like "growth" or "income."
2. Transparency. Unlike mutual funds, you know what's in your account. You can see what you own.
3. Tax management. Your portfolio can be run so that annual state or federal taxes are minimized.
4. Competitive fees. Account managers generally charge a flat annual fee rather than full-service brokerage commissions.
5. Performance. Managed accounts often offer the services of top money managers using investment systems with favorable track records.
6. Convenience. If you are too busy to give your investments the attention they deserve - or if you are an inexperienced or emotional investor - having a professional run your portfolio may be your best solution.
Of course, managed accounts have drawback too. For starters, there are all kinds of money managers: good, bad and mediocre. Clearly, it's not worth paying for anything less than the best manager you can find.
Then there is the matter of costs. Managed accounts are generally cheaper than using a full-service broker in a transaction-based relationship. Still, no one can manage your money more inexpensively than you can on your own.
Managed accounts are generally not for do-it-yourselfers. If you enjoy the investment process, have the time and expertise to implement your own investment strategy, and are satisfied with your results, you don't need to turn your money over to someone else to manage.
I recently spoke with Greg Galloway, President of Fund Advisors in Orlando, FL, who runs some managed accounts based in part on The Oxford Club's asset allocation and investment recommendations. I asked him to address the drawbacks I just mentioned.
"Look," he said with a laugh, "I'll be the first to concede that managed accounts aren't for everybody. However, I speak to a lot of investors who realize they could be doing a lot better than they are. They know they should asset allocate their portfolios, but they don't. Or they aren't sure how. They don't want to be over- or under-diversified, but we look at their portfolios and see that they are. They know they should run trailing stops behind their stocks, but they get distracted or forget. Many of these people are smart, sophisticated investors, incidentally. They're just too busy running a company, taking care of their families or pursuing their interests to give their portfolios the attention they deserve."
How about investors who say they can save money by doing it on their own?
"You may be able to do it more cheaply on your own," says Greg. "But, remember, the most important question is not 'what are my costs?' It's 'Am I satisfied with my investment returns net of whatever fees I'm paying?' If the job isn't getting done, you may want some help."
In the end, whether or not you need to consider a managed account really boils down to whether or not you prefer to grow your own tomatoes. Stick with me a moment…
Some people are natural gardeners. They want to till the soil, plant the seeds, water them, fertilize them, weed them and, eventually, harvest them. When they eat those tomatoes, they have the pride and satisfaction of knowing they raised them themselves.
Other folks are uninterested, unqualified, or too busy to grow their own tomatoes. They stop at the Farmer's Market on the way home and just pick up a bag.