Tailored versus off-the-shelf managed accounts: Which is suitable for your practice?

Managed accounts are a popular and efficient way for advisers to offer investment solutions to their clients, thanks to their transparency, control, and cost-effective implementation.

If you’re looking to harness the benefits of managed accounts, the question is how best to implement a managed account offering in a way that aligns with your business objectives, investment philosophy, and back-office capabilities.

Managed accounts can broadly be categorised into two types: tailored and off-the-shelf. Each comes with its own set of advantages and limitations, making them suitable for different practices. Here we take a look at the pros and cons of each type to help you assess which is most suitable for your practice.

Tailored managed accounts

Tailored managed accounts offer greater control and customisation, but are typically more costly, time consuming and resource intensive compared with off-the-shelf solutions.

Tailored managed accounts allow advisers to actively participate in investment decisions and portfolio design, which is ideal for those who prefer a hands-on approach or seek to offer a highly personalised investment experience for their clients. Additionally, tailored managed accounts can facilitate the incorporation of specific asset preferences such as direct equities and ethical or ESG considerations, ensuring portfolios meet unique client needs and adhere to risk profiles.

However, the drawbacks include higher operational costs compared with off-the-shelf solutions, and a substantial minimum funds under management (FUM) requirement. Thanks to the evolution of platform technology, this FUM requirement has come down in recent years, but experts suggest that around $100 to $150 million is required to make tailored managed accounts feasible.

The process of establishing and maintaining tailored managed accounts is also more complex, demanding significant time and resources from the adviser. This complexity can pose challenges for smaller practices or those with limited capacity to manage them effectively.

This is why, for practices heading down the tailored route, they should aim to have a majority—and ideally more than two thirds—of their clients in a managed account. Otherwise, the business risks being burdened with parallel processes, which can be complicated and confusing for staff.

Advantages:

• Customisation and control: Tailored managed accounts offer significant control over portfolio management, allowing advisers to align investments closely with their practice’s philosophy and client needs.

• Branding: These accounts often provide opportunities for branding, helping to bolster the advice practice’s visibility and client trust.

• Active involvement: Advisers can be actively involved in the design and ongoing management of portfolios, which is appealing for those who wish to maintain a direct influence over investment decisions.

Disadvantages:

• Higher costs: The customisation and management of tailored managed accounts typically comes at a higher cost, which might be prohibitive for smaller practices or those with less capital.

• Poorer economies of scale: They require a higher level of FUM to be feasible, making them less accessible for practices managing smaller asset bases.

• Time-intensive: The need for active involvement in managing tailored managed accounts demands more time and resources, which could detract from other business areas.

Off-the-shelf managed accounts

Off-the-shelf managed accounts provide ready-to-use, scalable options without the degree of personalisation possible with a tailored alternative. These portfolios are pre-configured and managed based on a set strategy, offering an easy solution for clients who desire professional management without the need for customisation.

Off-the-shelf managed accounts offer several advantages, such as operational efficiency and ease of implementation. They are cost-effective and typically don’t require a minimum FUM commitment to make them feasible from a business standpoint, making them suitable for a wider array of advisers and clients.

While off-the-shelf solutions are simpler, they aren’t necessarily lacking in sophistication. For example, they can be an effective way to gain exposure to professional portfolio management, including asset allocation views, broad diversification, or active strategies. The straightforward nature of off-the-shelf managed accounts means advisers can spend more time with their clients, focusing on a range of advice needs beyond investment selection.

However, there are important factors to consider. Because they’re designed to meet a broader set of client needs, off-the-shelf managed accounts might not meet specific adviser investment preferences, and advisers might find the limited control over investments to be a disadvantage, especially those who prefer to be more involved in the investment process.

Advantages:

• Cost-effectiveness: Off-the-shelf managed accounts are generally more affordable, making them accessible to a broader range of clients, including those with lower investment values.

• Simplicity and efficiency: These accounts streamline the investment management process by outsourcing decision-making and administrative tasks. This allows advisers to focus more on client relationships and less on day-to-day investment management.

• Standardisation: They provide a standardised investment solution that can be matched to clients based on their risk profiles and objectives without the need for bespoke portfolio management.

• Operational benefits: Automatic updates and reduced paperwork are significant operational benefits that enhance efficiency within an advisory practice.

Disadvantages:

• Less customisation to practice needs: ‘One size fits most’ off-the-shelf managed accounts offer less flexibility in portfolio construction and don’t allow advisers to incorporate their unique investment philosophies.

• Lack of control: Advisers have minimal involvement in the ongoing decision-making process, which might not be suitable for those who prefer a hands-on approach.

• No branding opportunities: Generally, off-the-shelf managed accounts don’t offer options for practice branding, which can be a drawback for firms looking to enhance their market presence.

Choosing the right provider

Given the popularity of managed accounts and the growth in different investment strategies, advisers are increasingly spoilt for choice.

If you’re considering an off-the-shelf solution, assessing all the options and ensuring the right fit can feel overwhelming. Here are four of the key factors to examine when selecting your managed account provider:

• Investment philosophy alignment: Ensure the provider’s philosophy matches your approach.

• Experience and reputation: Assess the track record and expertise of the provider’s investment team.

• Cost and operational support: Evaluate the provider’s cost structure and the support offered for account management and transitions.

• Customisation and communication: Look at the provider’s ability to offer tailored solutions and effective client communication.

The choice between tailored and off-the-shelf managed accounts depends largely on your specific needs and those of your clients. While the tailored option offers control and customisation, off-the-shelf alternatives offer simplicity and cost efficiency, without necessarily sacrificing sophistication. By carefully assessing your client base, investment philosophy, advice process and efficiency needs, you can make a decision that suits your practice.

For sophisticated portfolios made simple, check out Vanguard’s Diversified Managed Account Strategies.

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