Many investment managers and investment companies offer a managed account option that can work well for investors with large accounts. Advisors are usually compensated under the fee-based model — in which they earn a fee based on a percentage of the size of the account. Some managers offer managed portfolios of mutual funds for smaller accounts, but you'll more commonly see managers offering individual stock portfolios with larger account asset minimums of $500,000 or more.

Advantages over Mutual Funds

Managed accounts offer a service advantage over mutual funds because you have direct access to the investment managers themselves. Managed accounts, also called separate accounts, are like private mutual funds. You give your money to a manager, who then invests it in a variety of individual securities — stocks, bonds, or other investments — under a policy statement similar to the investment objective your mutual fund manager outlines in the mutual fund prospectus.

Most managers offer a limited choice of account styles, such as moderate, aggressive, or even more specifically, small-cap value, for example, that capitalize on their particular investing expertise. Just as you might invest in a variety of different mutual funds, individual investors, using separate accounts, will own more than one account in order to take advantage of the expertise of managers with different specialties. Often this group of separate managers is overseen by a financial planner, or even the investor herself, and can include managers whose accounts cover a variety of asset classes such as small cap U.S. stocks, non-U.S. stocks, municipal bonds, or a special sector such as, for example, alternative energy companies.

When to Use Them

Managed accounts can be helpful if your account is large and you're an inexperienced investor. If you're more comfortable managing a team of people than you are a large portfolio, you may find the special service option of separate accounts appealing. If you are an educated but not an expert investor, and you'd rather pay the fee than become a do-it-yourself investor, then a fee-based or fee-only manager may be a good investing partner.

What to Look For

Most separate account managers work on the theory discussed earlier that active investment picking will be more successful over time than a passive approach or investing in market indexes. If you also subscribe to this opinion and can find a successful manager with exceptional customer service, the added expense might be worth it.

The experience of your separate account manager is very important. Often, you'll find a manager who has begun his career managing funds at a large firm such as State Street Global Advisors or Morgan Stanley, and then decided to open his own shop. This new company may be small, but the size of the firm matters less than the manager's expertise, track record, and resources. Ask prospective managers to provide historical performance reports of accounts they have managed. Ask them to outline the resources at their firm's disposal to help them continue their large-firm track record when managing your account. Many managers move clients into preset accounts, selling the client's current assets and buying new investments that follow the manager's predetermined portfolio. If this is the case, be sure you've planned for any tax consequences of selling your current investments.

By far the most important part of working with separate accounts is your relationship with your money manager. Ask about his business plans. Will you continue working with him as he grows? Have other associates in the firm, who may do the day-to-day, hands-on work of managing your assets, had the same investing success that the principals have? Ask about fees and how they might change as your account changes in value. Separate accounts typically charge an annual fee equal to 1 percent of the assets they manage for you, up to a certain dollar limit that reduces as your account grows.