WHAT ARE MANAGED TRADING ACCOUNTS?
For beginners, the complex, intricate ways of the financial market are often confusing. The types of analysis, different kinds of data and their controverting pointers, numerous trading styles, the vast choice of brokers, and the many things that scream sell and buy all the time are overwhelming to those new to the market. With that being, managed trading accounts are one of the recent methods for successful investment. You should know that trading is a risky business. However, most of the time, these risks come with good returns. This is the reason why managed accounts are popular among investors.
In some cases, people who are interested in managed trading don't have adequate skills and time to manage their funds and account. Thus, it is a critical issue to have an understanding of an activity that you are about to start.
In this post, we will explore everything you need to know about managed trading accounts, including their benefits. It will help you understand the fundamentals of managed trading before entering its waters.
Let's get started.
What are Managed Trading Accounts?
A managed account is an investment account owned by an individual investor - either by a retail investor or by an institutional investor. The investor hires a professional money manager to oversee the account. The manager is armed with unrestricted authority over the managed trading account, allowing him to actively make investment decisions appropriate to the investor, considering the investor's goals and needs, asset size, and risk tolerance. The professional manager, on your behalf for a fixed share of profits or salary, trades your funds. You may choose a specialized firm or an independent broker for managing your funds. However, you need to be careful in selecting the money manager that has earned a good reputation and that you can trust. Although most money managers are legit, there have been some notable scams in the past. But you need to understand that scam is always there where the money is involved.
How Does a Managed Trading Account Works?
A managed trading account may contain titles to property, cash, or financial assets. The money manager has the authority to sell and buy assets without any prior approval from the investor, as long as the manager acts according to the investor's objectives.
As an investor, you need to have a certain amount of funds to invest. That is, money managers often require minimum dollar amounts of the account to manage. In most cases, the minimum starts at $250,000. However, some managers accept $100,000 or even $50,000. So, it is safe to say that managed trading accounts is for big-time investors who can easily invest large amounts.
High-end investors looking for great investment opportunities can prefer managed trading for higher returns. To compensate the investment managers for their efforts, they charge an annual fee, which is calculated as a percentage of the AUM (assets under management) or profit share. Although the fees range greatly -manager by the manager, based on their expertise, the average compensation fees are around 1% to 2% of assets under management or 50% of gained profits (the hybrid system is also possible). However, based on the asset size, managers may provide discounts to investors. Hence, the larger the portfolio, the lesser the percentage fee. The percentage fees and profit share are tax-deductible.
What to Look For in a Managed Trading Account?
Managed trading accounts have given investors a platform to regulate their own financial fate. While smart investment choices can lead to riches, committing errors can be extremely costly. Some investors are so daunted by the potential to suffer calamitous losses that they do not even try to find a brokerage company. Thus, they leave all their money in low-return investments like CDs or bank accounts. This won't provide the necessary growth you are looking for to achieve your financial goals.
However, just because you are afraid to go alone with your investments does not mean that you cannot invest at all. This is where managed trading accounts come into play. It gives you peace of mind that your money will get the attention it deserves. While there are potential dangers involved with managed trading accounts, it is critical to avoid potential pitfalls and seek out favorable characteristics when you are evaluating managers.
The rise of online managers has stemmed from people being keen to learn the ropes and manage their own funds. Even though you have a traditional broker, you won't have a managed trading account unless you specially ask for it. Brokers, managers can give you investment advice, recommending that you make certain purchases. However, the manager performs all the dealings, but you will be notified about where your money is being invested.
If you are responsible for making all the financial decisions, then you have a traditional trading account than a managed trading account. With a managed trading account, you give the authority to the investment company itself for making investment decisions. It means that you won't necessarily get an email, phone call, or other communication that your money manager is going to make a trade in your managed trading account. Rather, you will find out about it when you get your monthly statement or when you check your account.
What Type of Investments Will a Managed Trading Account Hold?
Different trading corporations offer different types of managed trading accounts. In most cases, your money manager will select a group of individual stocks or commodities and divide your investments across all of them for building a diversified portfolio. Money managers have an internal team of professional portfolio managers who evaluate many stocks and choose the ones that they believe have the best prospects for success.
With others, managed trading accounts specialize in investing in exchange-traded funds or mutual funds only. In this scenario, the use of funds makes the portfolio automatically well-diversified. Moreover, the nature of the fund management services offered revolves around the judgments of how much capital to disburse to each fund, instead of picking only particular winning stocks.
While both approaches their advantages and disadvantages, it is essential to ask the right questions in order to ensure that you are not being taken for granted by the prospective money manager.
What Makes a Good Managed Trading Account?
Look for the following characteristics if you want to have the best managed trading account.
Profit share scheme (without AUM) - it is always good to pay for a result
Access to investments when you want
Caters to your individual needs
Smart tax management for minimizing potential taxes on the gain and taking benefit of tax benefits on losses
For starters, you would want a managed trading account that allows you to invest in the types of assets you want. That is, if you want exposure to the individual stocks, then you will not want to deal with an investment firm that only offers mutual funds in its managed trading accounts. Correspondingly, if you are comfortable with a mutual fund option, then you probably might be happy with diversified assets rather than having a portfolio with individual stocks.
On the other hand, when it comes to getting a managed trading account from an investment company, the most important thing to consider is how much you will have to pay. Most money managers offer a fee schedule, as discussed earlier, which is based on the amount of money you are investing in.
Moreover, managed trading accounts may come with substantial tax consequences. That is, if the money manager makes frequent sales and purchases, then there is a possibility that you could end up owing a lot of capital gains tax on profits. This is when you have a regular taxable account. Experienced money managers have plans to eliminate or minimize tax liability, though it is worth knowing how your preferred money manager will handle the situation.
Overall, the whole scenario of paying for investment management gives you peace of mind, making you feel comfortable throughout your investment. This means that you should never refrain from contacting your money manager if you have concerns or questions. If you think that your money manager is resisting giving you the service you deserve, then you should probably think about switching to a different money manager or firm.
Be Smart About Managed Trading Accounts
Once you understand the things involved in getting your account managed by a broker, it can take the big burden off your shoulders and can benefit you in reaching your long-term financial goals. However, if you think that it is worth to handle things on your own, you can make investments on your own. It doesn't take a huge amount of effort to invest successfully. This allows you to avoid unnecessary fees.
However, going with a money manager is recommended as they have all the experience regarding the financial market. They would know when to invest and when to sell.
Using a Wrong Broker or Firm Could Cost you Serious Money
There is no better way to increase your wealth than investing in managed trading accounts. However, using the wrong money manager or firm could make a significant dent in your investing returns.