A managed account is a professionally run investment portfolio in which you directly own every stock, bond, or fund the manager buys for you. That direct ownership is what separates managed accounts from mutual funds, and it drives most of their advantages: control over when taxes are triggered, the ability to exclude specific holdings, and full visibility into what you own. The trade-off is cost. Annual fees typically run 0.50% to 1.50% of assets, and traditional programs have historically required six-figure minimums, though digital versions have brought that floor down sharply.
How Managed Accounts Work
In a mutual fund, you own shares of the fund itself. In a managed account, the individual securities sit at a custodian in your name. You can log in and see each position, its cost basis, and when it was purchased.
The manager operates under discretionary authority, which means they can buy and sell in your account without calling you first. You grant that authority in writing before any trading begins. FINRA requires your written authorization naming the specific individual who will exercise discretion, and the firm must accept the account in writing as well.1Financial Industry Regulatory Authority. FINRA Rule 3260 – Discretionary Accounts
The boundaries of that discretion are spelled out in an investment management agreement covering your objectives, risk tolerance, guidelines, and any restrictions you want applied. The manager trades freely within those boundaries but cannot stray outside them. FINRA also requires the firm to review discretionary accounts regularly and flag trading that looks excessive relative to the account’s size.1Financial Industry Regulatory Authority. FINRA Rule 3260 – Discretionary Accounts
The Main Types
Separately Managed Accounts
A separately managed account (SMA) runs a single investment strategy through one portfolio manager or team. You might open one SMA for a large-cap growth stock strategy and another for an investment-grade bond ladder. Transparency is total, which makes SMAs especially useful if you want tight control over tax outcomes or need to avoid specific holdings for personal, religious, or professional reasons.
Unified Managed Accounts
A unified managed account (UMA) bundles multiple strategies into one account. Each strategy lives in its own “sleeve,” and an overlay manager coordinates rebalancing and cash flow across all of them. UMAs can hold individual securities alongside mutual funds and ETFs in different sleeves. The result is simpler paperwork, consolidated reporting, and better coordination when it comes to taxes, which matters for reasons covered below.
Advisor-Directed Programs
In an advisor-directed program, sometimes called Rep-as-Portfolio-Manager, your financial advisor takes direct discretion over the portfolio rather than delegating to an outside institutional manager. The advisor builds a custom portfolio from approved securities and makes the trading decisions. That shifts investment decision-making from a specialized manager to the advisor sitting across from you, which is worth knowing when you evaluate the advisor’s own investment expertise.
What It Costs
Most managed accounts charge an annual fee calculated as a percentage of assets under management. A common range is 0.50% to 1.50% per year, and the rate usually steps down as your balance grows. A manager might charge 1.00% on the first $500,000 and 0.75% on everything above that. Fees are typically billed quarterly against the account value at quarter-end or the average daily balance, and the fee is usually debited directly from your account.
Wrap Fees
Many programs use a wrap fee, which bundles investment management, trading costs, and sometimes custodial and administrative fees into a single annual percentage. You are not paying separate commissions on each trade. Firms sponsoring wrap fee programs must deliver a specific brochure disclosing the total fee, the portion paid to the portfolio manager, and whether the program could cost you more or less than buying those services separately.2Securities and Exchange Commission. Form ADV Part 2 – Uniform Requirements for the Investment Adviser Brochure
The disclosure must also identify anything you might pay on top of the wrap, such as mutual fund expense ratios or markups paid to market makers. If the person recommending the wrap program receives compensation tied to your participation, that conflict must be disclosed too.2Securities and Exchange Commission. Form ADV Part 2 – Uniform Requirements for the Investment Adviser Brochure
Performance-Based Fees
Federal law generally prohibits registered investment advisers from charging fees based on a share of your investment gains.3Office of the Law Revision Counsel. 15 USC 80b-5 – Investment Advisory Contracts The exception is for “qualified clients,” which currently means at least $1.1 million in assets under management with the adviser or a net worth exceeding $2.2 million. Those thresholds were last set in 2021, and the SEC is scheduled to adjust them for inflation on or about May 1, 2026, so the numbers may rise slightly.4U.S. Securities and Exchange Commission. Inflation Adjustments of Qualified Client Thresholds Performance-based arrangements are most common in hedge fund strategies and high-net-worth advisory relationships, typically structured as a percentage of gains above a benchmark, sometimes with a high-water mark that prevents the manager from earning performance fees on the same gains twice.
Minimum Investments to Get In
Traditional SMAs are not entry-level products. Minimums at major firms typically start around $100,000 for equity strategies and can reach $350,000 or more for bond strategies, though these vary by firm and strategy. Running an individualized portfolio with dozens of positions becomes impractical below a certain account size.
Digital managed accounts have lowered the barrier. Several major brokerages now offer automated managed accounts with no account minimum and investment thresholds as low as $10. These platforms use algorithms to build and rebalance diversified portfolios of ETFs. Customization is far more limited than a traditional SMA, but the core structure is the same: you own the underlying securities, and a professional or algorithm manages the allocation.
The Tax Case for Direct Ownership
The biggest tax advantage over a mutual fund is control over when you recognize gains and losses. In a mutual fund, the fund manager buys and sells throughout the year, and every shareholder receives a proportional share of the resulting capital gains distribution, whether they want it or not. You can owe taxes on gains you never chose to realize.
In a managed account, you own each security individually. Your manager can sell a position that has declined in value to harvest that loss for tax purposes while buying a similar (but not identical) holding to keep your allocation intact. The harvested loss offsets realized gains elsewhere in your portfolio, and if losses exceed gains, up to $3,000 can offset ordinary income per year. Unused losses carry forward indefinitely. Each purchase creates its own tax lot, so a good manager uses that lot-level data to sell the highest-cost lots first and minimize taxable gains. These benefits apply to taxable accounts only, not IRAs or 401(k)s.
The Wash-Sale Trap
Tax-loss harvesting has a significant pitfall. If you buy the same security, or one the IRS considers “substantially identical,” within 30 days before or after selling at a loss, the IRS disallows the loss entirely under the wash-sale rule.5Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities The rule applies across all of your accounts. If your SMA sells a stock at a loss on Monday and your 401(k) buys the same stock on Wednesday, the loss is disallowed.
This is where UMAs have an advantage over multiple standalone SMAs. Because a UMA’s overlay manager can see all the sleeves at once, it can coordinate trades to avoid triggering wash sales across strategies. With separate SMAs at different managers, that coordination falls on you or your advisor, and it is easy to miss.
How You’re Protected
Your Assets Sit at a Custodian, Not the Adviser
Managed account assets are held by a qualified custodian, not by the investment adviser. SEC rules make it a violation for an adviser to have custody of client funds unless those funds are maintained by a qualified custodian in a separate account under the client’s name. The custodian must send you account statements at least quarterly, showing every holding and transaction.6eCFR. 17 CFR 275.206(4)-2 – Custody of Funds or Securities of Clients by Investment Advisers
Your adviser tells the custodian what to buy and sell but never handles your money directly. If the advisory firm closes or runs into trouble, your securities are still sitting at the custodian in your name.
Fiduciary Duty and Reg BI
Registered investment advisers are regulated under the Investment Advisers Act of 1940. Its anti-fraud provisions make it unlawful for any adviser to use deceptive practices or engage in any course of business that operates as a fraud on clients.7Office of the Law Revision Counsel. 15 USC 80b-6 – Prohibited Transactions by Investment Advisers The SEC has interpreted these provisions as establishing a fiduciary duty covering the entire advisory relationship, requiring the adviser to eliminate conflicts of interest or fully disclose them in terms specific enough that you can consent to them or walk away.8Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
Some managed account programs are offered through broker-dealers rather than RIAs. Since June 30, 2020, broker-dealers have been subject to Regulation Best Interest, which requires them to act in your best interest when making recommendations and prohibits putting the broker’s interests ahead of yours.9Securities and Exchange Commission. Confirmation of June 30 Compliance Date for Regulation Best Interest and Form CRS Reg BI is stricter than the old suitability standard but not identical to a fiduciary duty. The practical difference shows up around conflicts: an RIA must eliminate or disclose them in detail, while a broker-dealer must establish written policies to identify and address them, with somewhat more room for conflicts to exist if properly managed.
Read the Form ADV Before You Sign
Before you sign an advisory agreement, the adviser must deliver a Form ADV Part 2A brochure. This is the single most useful document for evaluating the relationship. It must be written in plain English and cover services, fee schedules, conflicts of interest, disciplinary history, and investment strategies.2Securities and Exchange Commission. Form ADV Part 2 – Uniform Requirements for the Investment Adviser Brochure
The brochure must be updated annually and delivered within 120 days of the adviser’s fiscal year-end, either as a full update or a summary of material changes with an offer to send the complete document. New disciplinary information must be delivered promptly rather than waiting for the annual cycle. Read the conflicts section carefully. The SEC has said an adviser must disclose conflicts that actually exist, not just say they “may” have a conflict when they definitely do.2Securities and Exchange Commission. Form ADV Part 2 – Uniform Requirements for the Investment Adviser Brochure
Transferring or Closing a Managed Account
Because you own the securities directly, leaving a managed account does not require you to sell everything. You can move your holdings to a new brokerage through an in-kind transfer, which shifts the actual securities without liquidating them. That avoids the capital gains taxes a forced sale would create and keeps you invested during the transition.
Most transfers between brokerages use the Automated Customer Account Transfer Service (ACATS), an electronic system run by the National Securities Clearing Corporation. You submit a Transfer Initiation Form to the new firm, and the old firm must validate or reject the instruction within three business days. Not all assets transfer through ACATS. Certain holdings such as annuities or proprietary products may need to be liquidated or handled manually, which can take longer.10Financial Industry Regulatory Authority. Customer Account Transfers
Before initiating a transfer, check the receiving firm’s policies. Some securities that were fine inside your current program may not be eligible at the new firm, and model-specific positions from a proprietary strategy may not make sense outside their original program. If liquidation ends up being forced, factor the tax impact into your timing.