Kevin Greenard: Managed accounts provide piece of mind

Kevin Greenard

A managed account is a broad term that has been used in the financial-services industry to describe a certain type of investment account where a portfolio manager has the discretion to make changes to your portfolio without verbal confirmation.

There are different names and types of managed accounts which may be confusing for investors when looking at options between financial firms. To assist you in understanding the basics of managed accounts, we will divide the broad category into two subcategories — individually managed accounts and group managed accounts.

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Both individually managed and group managed are fee-based type accounts, as opposed to transactional accounts, where commissions are charged on activity. Individually managed accounts must be fee-based and generally have a minimum asset balance of $250,000.

Before we get into the differences between individually managed and group managed accounts, we should also note that strict regulatory and education requirements are necessary for individuals in the financial-service industry to be able to offer managed accounts. The designation portfolio manager is typically awarded to individuals who are able to open managed accounts. Financial firms may also stipulate certain criteria prior to allowing their employees to provide discretionary advice or portfolio management services. Examples of additional criteria that may be required by financial institutions include a clean compliance record, minimum amount of assets being managed, good character, and significant experience in the industry.

For the purposes of this article, the term investment adviser is different from portfolio manager.

A portfolio manager may have the ability to offer individually managed accounts on a discretionary basis, whereas an investment adviser does not. An investment adviser must obtain verbal authorization for each trade that they are recommending. A client must provide approval by signing the appropriate forms in order for the portfolio manager to manage their accounts on a discretionary basis.

Above, we noted the two broad types of managed accounts — individual and group. A portfolio manager is able to offer both individual and group accounts on a discretionary basis. The individual account is a customized portfolio where the portfolio manager is selecting the investments. Although an investment adviser is not able to offer individually managed accounts, they can offer group managed accounts through a third party.

A simple example of this is a mutual fund which is run by a portfolio manager. A more complex example of this is the various wrap or customized managed accounts offered by third party managers. An investment adviser can recommend to their clients a third party group-managed account.

The role of an investment adviser in a group-managed account option is to pick the best third party manager and to assist you with your asset allocation. When looking at this option, you must weigh the associated costs over other alternatives. The group-managed account has set fees. With individually managed accounts, the portfolio manager has the ability to both customize the portfolio and the fee structure.

Trust is an essential component that must exist in your relationship to grant a portfolio manager the discretion to manage your accounts. Prior to any trades, the portfolio manager and investor create an Investment Policy Statement (IPS) to set the trade parameters for the investments. The IPS establishes an optimal asset mix and ranges to ensure that cash, fixed income, and equities are suitable for the investors risk tolerance and investment objectives.

Quicker Reaction Time: Having a managed account allows the portfolio manager to react quickly to market changes. If there is positive or negative news regarding a company, the portfolio manager can move clients in or out of a stock without having to contact each client individually. With markets being volatile this can help with reaction time. For an investment adviser to execute the movement in or out of a stock, it would involve contacting each client and obtaining verbal confirmation.

Strategic Adjustments: If a portfolio manager has numerous clients and would like to raise five per cent cash, this can be done very quickly with an individually managed account. It is more difficult for an investment adviser to do this quickly as verbal phone confirmation is required for each client in order to raise cash. Even with a group- managed account, an investment adviser would have to contact each client to change the asset mix weighting.

Rebalancing Holdings: With managed accounts, clients have unlimited trades. This is important as it allows a portfolio manager to increase or decrease a holding without being concerned about going over a certain trade count. As an example, we will use a stock that has increased by 30 per cent since the original purchase date. Trimming the position by selling 30 per cent is easy for a portfolio manager as a single block trade can be done. This block trade is then allocated to each household at the same price. If an investment adviser wanted to do this same transaction, it would likely take multiples days/weeks and over this period each client would have a different share price depending when the verbal confirmation was obtained.

Extended Holidays: If you are travelling around the world or going on a two month cruise, then you probably want someone keeping an active eye on your investments. An investment adviser is not able to make changes without first verbally confirming the details of those trades with you. A portfolio manager is able to make adjustments within the IPS parameters, provided you have a managed account set up before your departure.

Aging Clients: When our clients are aging, we often recommend that they introduce us to their family members and the people they trust. We encourage most of our clients to set up a Power of Attorney (POA) and to plan for potential incapacity later in life. Portfolio managers have a distinct advantage in this area as we can have a meeting with the family and document everything very clearly in an IPS. Having managed accounts, clearly documented IPS, and a POA will ensure that a portfolio manager can continue managing the investments appropriately.

Not Accessible: If you work in a remote area (mining or oil and gas industry), chances are you may be out of cell phone reach from time to time. In other situations, your profession does not easily allow you to answer phone calls (a surgeon in an operating room). In other cases, a lack of interest may result in you not wishing to be involved. A managed account may be the right option for clients that are frequently difficult to reach to ensure opportunities are not missed. In these situations, the portfolio manager can proactively react to changing market conditions.

Managed accounts greatly simplify the investing process for both you and the portfolio manager. It enables our clients to focus on aspects of their life that are most important to them while knowing that their finances are being taken care of.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138. greenardgroup.com

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