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 on your behalf (i.e. without first verbally confirming the changes). 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. Both individually managed and group managed accounts are fee-based type accounts, as opposed to transactional accounts where commissions are charged on each activity. Individually managed accounts are the most popular type of account for affluent individuals. Individually managed accounts must be fee-based and may have a minimum asset balance of $250,000 although most are in excess of $1,000,000.
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 services industry to be able to offer managed accounts. The designation “Portfolio Manager” is granted to individuals who are registered to offer managed accounts for their clients, after meeting the stringent proficiency requirements. 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 “Wealth Advisor” is different from “Portfolio Manager.” A Portfolio Manager may have the ability to offer individually managed accounts on a discretionary basis, whereas a Wealth Advisor does not. A Wealth Advisor must obtain verbal authorization for each trade that they are recommending. A client must provide approval by signing the appropriate forms 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 can 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 a Wealth Advisor 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. A Wealth Advisor can recommend to their clients a third-party group managed account.
The role of a Wealth Advisor in a group managed account option is to select an appropriate 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 customize both 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.
At the Greenard Group, we focus solely on individually managed accounts; below are our top 10 reasons and benefits of why we do that:
1) Ability to react quickly: Having a managed account allows the Portfolio Manager to react quickly to market changes. If there is positive or negative news regarding a company then 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 a Wealth Advisor to execute the movement in or out of a stock, it would involve contacting each client and obtaining verbal confirmation.
2) 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 a Wealth Advisor to do this quickly as verbal phone confirmation is required for each client in order to raise cash. Even with a group managed account, a Wealth Advisor would have to contact each client to change the asset mix weighting.
3) Unlimited trades: 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 portfolio where some of the holdings have increased to the point where it’s time to rebalance. With a regular fee-based account, you must be conscious of how many remaining trades you have available, whereas with a managed fee-based account there is no limit to the number of trades you can do. This ensures that trade counts take a back seat and the investments take priority.
4) Rebalancing holdings through block trades and switch trades: We will illustrate block trades and switch trades with an example. In our Moderate Growth Model Portfolio, a stock that has increased by 40 per cent since the original purchase date. Trimming the position by selling 40 per cent is easy for a Portfolio Manager as a single block trade can be done to trim the position. This block trade is then allocated to each household at the same price. If a Wealth Advisor wanted to do this same transaction, it would likely take multiple days/weeks and over this period each client would have a different share price depending when the verbal confirmation was obtained. With a switch trade, the same mechanics apply and the proceeds from trimming the position are then used to purchase a different security right away. The block trade for the purchase is then allocated to each household.
5) Increased client focus and customization: By not having to call and confirm every transaction with their clients, Portfolio Managers can spend that time servicing their clients. It can allow Portfolio Managers to be proactive in their approach and spend time focusing on getting to know their clients and what matters most to them. With individually managed accounts, we can also discuss levels of customization that are specific to each individual client. Examples of this may be if a client wants to overweight a certain asset class or sector; if they transfer in a position from a previous employer; or if they do not wish to hold certain companies for personal reasons.
6) When you’re on vacation, your investments are still hard at work: Whether you are taking a week-long vacation, travelling around the world, or going on a two-month cruise, you probably want someone keeping an active eye on your investments. A Wealth Advisor is not able to make changes without first verbally confirming the details of those trades with you. A Portfolio Manager can make adjustments, within the IPS parameters, provided you have a managed account set up before your departure. No matter where you are travelling to, or what activities you are doing on your travels, you can relax and enjoy knowing your investments are taken care of.
7) 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.
8) Not accessible: If you work in a remote area (i.e. mining or oil and gas industry) then chances are you may be out of cell phone reach from time to time. In other situations, your profession may not easily allow you to answer phone calls (i.e. a surgeon in an operating room). In other cases, a lack of interest may result in you not wishing to be involved in the day to day investment activity. 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.
9) Enhanced regulatory and training requirements: Portfolio Managers are held to a higher duty of care, often referred to as a fiduciary responsibility. By accepting this fiduciary responsibility, your Portfolio Manager commits to acting in your best interests. Not every advisor is awarded the title of Portfolio Manager, and as mentioned above, Portfolio Managers are also subject to strict regulatory oversight and additional ongoing training requirements to maintain this title.
10) Peace of mind: 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, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250.389.2138, email firstname.lastname@example.org, or visit greenardgroup.com.