If any of the following describe your financial situation, you may start thinking about choosing a managed account:
- You want to benefit from professional investment management.
- Or you have $100,000 or more to invest.
- You’ve recently inherited a substantial sum, sold your business, or won a financial settlement.
- Or you have retirement assets you’re ready to roll over.
A managed account fit
The ways you might use a managed account depend on several factors. For example, it includes the size of your overall portfolio, how diversified it is, and how actively involved you want to be in making investment decisions.
You might select a managed account for a part of your portfolio, investing the balance in traditional assets, like stocks, bonds, ETFs, or mutual funds, or a mix of traditional and alternative investments, such as private equity or commodity funds. Or, if most of your assets are in the United States, you might choose a managed account that invests internationally.
On the opposite hand, with a considerable portfolio but little interest in making your own investment decisions, you would possibly select two or three managed accounts focused on different investment goals. Or, if you had just $100,000 to invest, your financial adviser might recommend what’s sometimes called a lifestyle account that’s allocated among both stocks and bonds and invests to meet a more general goal.
Investing a lump sum
Rolling over a maturing bond or buying a stock that you like can be one of the ways to invest you feel comfortable. Of course, you can also add a fixed amount to a mutual fund account, retirement savings plan, or other investment accounts at regular intervals. But investing a lump sum, especially if it’s a large amount, probably requires a different approach.
One thing that can stop you is the fear of investing at a market high and then seeing your portfolio drop in value. You may also be perplexed about achieving the essential level of diversification to minimize the effects of volatility in your portfolio. And you might be overwhelmed by your choice: nearly 10,000 publicly traded stocks, over 7,500 mutual funds, and hundreds of thousands of bonds, not to mention variable and fixed annuity contracts or real estate investment trusts (REITs).
These are the main concerns that managed accounts address. A professional manager selects investments to diversify in an attempt to manage volatility. And the manager determines the timing of buys and sells of all assets. For example, the trader might place a pending order for a particular security and not buy until the price reaches that level. Or the manager might increase your position in a security for weeks or months to take advantage of dips in the price.
There’s no guarantee that you won’t lose money in a managed account, especially short term. Moreover, there’s no legitimate way to invest that can make that promise, except putting cash in an FDIC-insured account. However, there are limits on the amount that’s covered.
Another problem with choosing insured accounts for a long-term investment portfolio is that those accounts typically provide a return that’s only slightly higher than the inflation rate. That threatens to make you vulnerable to inflation risk or loss of purchasing power.
Beyond smiling in satisfaction or shaking your head in dismay when the statement of your retirement savings plan account arrives each quarter, you may not think much about how your account is invested. For example, if you’ve never changed how your contributions are allocated since you joined the plan, you’re not alone. The vast majority of people do the same unless they are influenced by news of other participants who have lost or are losing money themselves.
But when you change jobs or retire, your account could easily be worth hundreds of thousands of dollars. What to do then? One answer is simple – roll over the assets into one or more managed accounts in an IRA. You’ll preserve the money’s tax-deferred status, which postpones income tax on the principal and earnings until you withdraw. Moreover, a professional investment manager decides how your money is invested and ensures your portfolio is well diversified.
Rules are rules
Remember that earnings and capital gains in a managed account funded with retirement rollovers continue to be tax-deferred. However, you owe income tax at your regular rate when you take money out of the account. It’s different with taxable managed accounts. In that case, you owe income tax each year on earnings in the account, but when you sell, any gains are taxed at your capital gains rate, which is lower than your regular income tax rate.
If you ask the investment manager to sell assets in a tax-deferred account before you turn 59½, you may owe a 10% early withdrawal penalty. And when you reach 70½, you must withdraw at least the required minimum amount each year. Your financial adviser, working with your investment manager, may be able to arrange to have the amount paid on a schedule you select. That can help simplify your life.
Are Managed Accounts Right For You? by Inna Rosputnia
Wishing you a great week!
Want Your Money To Grow?
Subscribe to get free research, trading lessons, and more insights.
(We do not share your data with anybody, and only use it for its intended purpose)