Month: September 2009

Making Sense of Managed Accounts

With the profusion of managed account products and services coming to the market with similar names such as “individually managed money”, “separately managed accounts” and “unified managed households” it can be confusing to sort out just what these services are about and what the differences are.

Originally these accounts were defined as a product or service wrapped up in one fee, hence they had been known as wrap accounts. Technological advances over the years have cut costs which in turn have allowed providers to reduce account minimum sizes and consequently an abundance of variations have appeared. Currently there are six broad categories of managed money with one common denominator; client’s pays a flat fee based on assets under management no matter how many transactions flow through the account.

  • Fee based Brokerage Accounts: they offer unlimited trading without commissions and are best suited for knowledgeable and frequent traders. The fee often includes access to a seasoned financial advisor for those do-it-yourself traders who could benefit from professional guidance.
  • Mutual Fund Wraps or Mutual Fund Advisory Programs: they are the most common managed products. They integrate preset asset allocation models with appropriate mutual funds for a range of client profiles. These accounts are periodically rebalanced to maintain the asset allocation between equity and fixed income proportions. These allocations in turn can be fixed or adjusted over time in line with the declining risk tolerances of aging clients.
  • Exchange Traded Funds (ETF) Wraps: they are relatively recent additions to the managed money space. They are similar to the mutual fund wraps but use ETFs in lieu of mutual funds as the investment vehicles. The main advantage of ETFs is somewhat lower costs which of course are appreciated by cost conscious clients. However most ETFs are only meant to track benchmark performance and the track record of actively managed ETFs is still relatively short.
  • Traditional Separate Account Programs: they go a step further as the investment vehicles are individual equity and fixed income securities held in distinct accounts for each client. In this case a portfolio management firm manages the trading of the assets and is able to introduce a level of customization to meet specific customer needs not available to mutual fund holders such as portfolio customization and tax management.
  • Overlay Separate Accounts: they add further diversification and a second level of oversight. These programs incorporate the services of multiple separate account managers into a single portfolio and an overlay portfolio manager oversees the process. Overlay programs are able to take advantage of the diversification and specialization benefits that a stable of managers can bring to the table.
  • Unified Managed Households (UMH): they represent the pinnacle of managed account programs. A client with stocks, bonds, ETFs, mutual funds and GICs would ordinarily hold these assets with a variety of institutions. A financial overview would therefore require a manual compilation; however a UMH brings all of these components into a single reporting structure with performance reported both at the consolidated level and separately for the stocks and bonds, the mutual funds and the GICs. A UMH also provides an ongoing view of the client’s progress relative to their investment policy statement.