Managed Accounts – Why To Avoid Them, And A List Of Alternatives

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Managed Accounts – The Alternatives

Managed accounts for binary options promise to make you money while you sleep, but the system is flawed. Luckily. There are three alternatives that provide a better service to traders while keeping more control in your hands. This article presents these alternatives, their advantages and disadvantages.

In detail, you will learn:

  • Why Not Managed Accounts?
  • Alternative #1: Signals
  • Alternative #2: Robots
  • Alternative #3: Social Trading

With this information, you will be able to pick the right form of automated binary options trading for you.

Why Not Managed Accounts?

Managed binary accounts promise that an account manager will take care of your money in the same way a mutual fund manager would when you invest in a stock market fund. Unfortunately, there are many problems with this concept:

  • Some brokers use managed accounts to scam you. They freeze your money, arguing that the account manager needs full control, but eventually, everything will be gone – allegedly lost in a series of bad-luck trades.
  • Your account manager is paid by your broker and your broker makes money when you lose money.
  • Because you make so many trades with binary options, even small fees can make your trading unprofitable.
  • It is often difficult to assess whether your account manager is a true professional and knows what they are doing.

As this list of problems indicates, using a managed account is risky. There are many unknowns, especially for newcomers. Someone who has never traded binary options before might find it difficult to judge whether their account manager is an experienced professional or a complete novice. These services often claim they are ideal for beginners – the opposite is true.

Nonetheless, the idea behind managed accounts is attractive. Hire someone to trade for you and make more money and save time. If you want to pursue this idea without getting a managed account, there are a few alternatives for you.

Let’s look at the three most popular options:

Alternative #1: Signals

Signals are based on a simple principle: a professional trader or a professional trading program tells you how to trade, but you have the last say. If you like a signal, you follow its instructions; if you do not like it, you simply do nothing.

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Most signals come as text messages on your phone or as emails. A typical signal could read:

DOW JONES, LONG, 2 HOURS

When To Trade

This signal tells you to invest in rising prices for the Dow Jones and use an expiry of 2 hours. Signals are simple-to-execute and easy-to-understand, which is why they are so popular with traders.

Most signal providers charge $99 a month for their subscription. If their signals are any good, they are definitely worth the money – good signals can easily make you more than $100 a month, even if you only have little money.

Good signal providers can win you around 70 percent of your trades, which is easily enough to make you money with binary options. Since almost all providers create their signals for high/low options, you have to win at least 60 percent of your trades to turn a profit. Everything above that value, and you make money.

Signal providers use two ways of creating signals:

  1. Automated computer programs. Some signal providers use computer programs that monitor the market and automatically create signals when the current market environment meets certain conditions. Such trading strategies are standard with short-term investments and can be highly profitable.
  2. Human traders send recommendations. Some signal providers use traders made of flesh and blood that monitor the market and send you recommendations. The profitability of these systems depends on the quality of the traders, which means that they can be quite good if you find a signal provider that employs qualified professionals.

Some signal providers are also trying to scam you. They provide random signals and hope that you stay with them for long enough to get at least some of your money.

Do Your Research

Luckily, you can recognise trustworthy signal providers by their money back guarantee. All signal providers that honestly try to win you trades provide you with a chance to test their signals risk-free. Usually, this test comes in the form of a 60-day money back guarantee where you can test the signals for two months, quit the service at any time, and get all your money back. Never sign up with a signal provider that denies you this testing phase.

Compared to a managed accounts, signals provide the advantage that you remain in full control of your account. You can recognise problems early and decide whether to trade every single signal.

The downside of signals is that you have to remain involved in the trading process. You have to be available and able to quickly react when you get a signal. Depending on your job and daily schedule, this might impossible.

Alternative #2: Robots

Robots take the idea of trading signals one step further. Just like signals, they monitor the market and search for profitable trading opportunities. The difference is that when a robot finds an opportunity, it automatically invests on your behalf.

The ways in which robots create signals are similar to those of signal providers. Some use automated computer programs; some use real-life traders.

To automatically execute its signals, your robot needs a connection to your trading account. This means sharing your login information and access to your money with another company. Some traders frown such a process and rather stay with signals, which is a legitimate decision. If you feel comfortable with a robot provider, however, you can also decide to take this step.

The fact that your robot must connect to your account also limits the available combinations of robots and brokers. You can always ask a broker’s customer support whether they can connect their robot to your broker, but sometimes this might be impossible for technical reasons.

Choose Your Own Broker

Some robots also use a list of recommended brokers that work best with the robot. More often than not, this list is a way of making the robot provider money. The broker gets a commission when they deliver a customer to the broker, and they use this convenient place to suggest that there is some technical necessity why you should quit your current account and get a new one. Be careful of these types of robot provides.

The advantage of robots is that you can completely outsource your trading process. That means you can minimise mistakes and leave the trading to the best professionals you can find.

In comparison to a managed account, robots provide the advantage of not being paid by your broker, thereby resolving the conflict of interest of an account manager who is employed by a broker that benefits when you lose money. Your robot provider makes money when you make money and keep subscribing to their service – which is a much more customer friendly business model.

Monitor Carefully

The downside of robots is that you relinquish complete control of your account. While your robot will be unable to steal your money, it could trade badly enough for you to lose everything. Unless you regularly monitor your account and stop a bad robot before it ruins you, you take a high risk.

In any case, you should carefully check your robot before you sign

Alternative #3: Social Trading

The third alternative to managed accounts is social trading. Social trading allows you to copy the trades of another trader just like you into your account.

To decide which trader to follow, you get a list of all available traders and their winning percentage. You will now that trader Dave has won 80 percent of his past trades, and you can choose whether to automatically copy his future trades into your account.

Most brokers also display the number of trades that a trader made over the last month or the amount of money they invested. Make sure to choose a trader that has made many trades. Otherwise, you risk following someone who has made only a handful of trades, which means that the winning percentage of such a small sample says nothing about the trader’s ability.

Copy Traders

Usually, binary options brokers allow you to adjust the amount of money that you invest in every single trade. This makes sense because those traders that you follow are often highly successful and invest a lot of money. For new traders, it is impossible to mirror the amount of money those people invest. By allowing you to determine how much you want to invest, your broker allows you to execute an effective money management.

Additionally, most brokers allow you to set a time limit for how long you want to follow a trader and a stop loss limit that automatically stops following the trader once they lose a number of trades or a specific amount of money.

These tools further increase your potential to protect your money. Even if a trader has won 80 percent of their trades in the past, they might lose 80 percent of their trades in the future. If you use social trading long enough, you will eventually follow a trader that is coming of a hot streak and running right into a losing streak. To survive such events, features that allow you to effectively protect your money are great tools.

Compared to managed accounts, social trading is an improvement.

  • You always get the latest stats on the trader who is investing on your behalf,
  • You can manage your money yourself, and
  • You get effective fail-safe tools.

These tools help minimise the downside and maximise the upside of automated trading.

Managed Accounts Overview

There are legitimate alternatives to binary options managed accounts. These alternatives target different kinds of customers with different goals. The main alternatives that you should know are:

If you want to keep complete control about which trades you make, use signals. To completely outsource your trading to someone who has nothing to do with your broker, choose robots. And to use a mix of automation and control, use social trading.

Managed Account

What Is a Managed Account?

A managed account is an investment account that is owned by a single investor, either by an institutional investor or an individual or retail investor. A professional money manager, hired by the investor oversees the account. Armed with discretionary authority over the account, this dedicated manager actively makes investment decisions pertinent to the individual, considering the client’s needs and goals, risk tolerance, and asset size.

Managed accounts hold many benefits for the high net-worth investor.

Key Takeaways

  • A managed account is an investment account that is owned by one investor but is supervised by a professional money manager who has been hired by that investor.
  • Money managers often demand six-figure minimum investments to manage accounts and are compensated by a fee, a set percentage of assets under management (AUM).
  • A mutual fund is a type of managed account, but it is open to anyone with the means to buy its shares, rather than personalized for a particular investor.

How a Managed Account Works

A managed account may contain financial assets, cash, or titles to property. The money or investment manager has the authority to buy and sell assets without the client’s prior approval, as long as they act according to the client’s objectives. Because a managed account involves fiduciary duty, the manager must act in the best interest of the client or potentially face civil or criminal penalties. The investment manager will typically supply the client with regular reports on the account’s performance and holdings.

Money managers often have minimum dollar amounts on the accounts they will manage. That is, a client must have a certain amount of funds to invest. Many minimums start at $250,000, though some managers will accept $100,000 and even $50,000 accounts.

To compensate the manager for his efforts, they will usually charge an annual fee, calculated as a percentage of the assets under management (AUM). Compensation fees range greatly, but most average around 1% to 2% of AUM. Many managers will provide discounts based on an account’s asset size, so that the larger the portfolio, the smaller the percentage fee. These fees may be tax-deductible, as investment expenses.

Managed funds are most often used by high net-worth individuals, due to the often high minimum dollar amounts required by most such funds.

Managed Accounts Vs. Mutual Funds

Managed accounts and mutual funds both represent actively managed portfolios or pools of money that invest over a variety of assets—or asset classes. Technically, a mutual fund is a type of managed account. The fund company will hire a money manager to look after investments in the fund’s portfolio. This manager may alter the fund’s holdings per the fund’s objectives. When mutual funds began to be marketed in earnest in the 1950s, they were touted as a way for the “little guy”—i.e., small retail investor—to experience and benefit from professional money management. Previously, this was a service available only to high-net-worth individuals.

Customized managed accounts address the account holder’s needs; mutual funds invest according to the fund’s objectives.

Managed account trades can be timed to minimize tax liability; mutual fund investors have no control when a fund realizes taxable capital gains.

Managed account-holders have maximum transparency and control over assets; mutual fund-holders don’t own the fund’s assets, only a share of the fund’s asset value.

Managed accounts often require six-figure minimum in funds; mutual funds demand much lower initial investment amounts.

It may take days to invest, or de-vest managed account assets; mutual fund shares are more liquid and can be bought or sold daily.

Compensation for managed account managers is by annual fees that can impact overall return; mutual funds’ expense ratio fees tend to be lower.

Management Considerations

Both managed accounts and mutual funds have professional managers. Managed accounts are personalized investment portfolios customized to the specific risks, goals, and needs of the account holder. Management of the mutual fund is on behalf of the many mutual-fund holders and done to meet the fund’s investment and return objectives.

With a managed account, the investor allocates funds, and the manager purchases and places physical shares of securities into the account portfolio. The account holder owns the securities and may direct the manager to trade them as desired. In contrast, mutual funds are classified by investors’ risk tolerance and the funds’ investment objectives, not by individual preferences. Also, investors purchasing shares of a mutual fund own a percentage of the value of the fund, not the fund itself or the actual assets in the fund.

Transactional Considerations

On the transactional side, events might move more slowly in a managed account. Days may pass before the manager has the money fully invested. Also, depending on the holdings selected, managers may be able to liquidate securities at specific times only. Conversely, shares of mutual funds may typically be purchased and redeemed as desired, daily. However, some mutual funds may carry penalties if redeemed before holding for a specified period.

The professional guiding a managed account may attempt to offset gains and losses by buying and selling assets when it is the most tax beneficial to the account’s owner. In doing so, it could result in little or no tax liabilities on a significant profit for the individual. In contrast, mutual fund shareholders have no control when portfolio managers sell the underlying securities so that they may face tax bites on capital gains.

Managed Account Example

In July 2020, managed funds were in the news, as several institutional investors simultaneously opted for them over the hedge funds that had been handling a portion of their portfolios. The investors wanted broader platforms, customized strategies, full control over their separate accounts, daily valuation, significantly lower fees, and full transparency when it came to those fees, as well as to the nature of the holdings themselves.

When Managed Accounts Make Sense

Investing your 401(k) can be confusing and tiresome. Many turn to managed accounts for help — should you?

Another year, another look at your 401(k) portfolio, and possibly another sigh of frustration. What are you supposed to do? How well did you do, really?

If this sounds familiar, you may have been tempted to just hand your portfolio over to an institution through a managed account and call it a day, letting someone else call the shots and deal with all the details.

Image source: Getty Images.

So, is it a good idea? While managed accounts struggle to beat the “optimal” 401(k) strategy, they may very well beat the “human” strategy that’s causing you so many headaches and problems.

Here’s what you need to know.

The heart of the matter: Fees
Fees are important because they add up quickly and compound over time — and managed accounts mean more fees.

These include any charges for the service plus whatever fees the selected mutual funds carry. If your manager favors active management (likely, as it provides a justification for managing the account), you’re also looking at paying for higher-cost, actively managed mutual funds.

In other words, paying more for help could end up costing you more than your own mistakes would have. The government’s General Accounting Office found that the offsetting influence of fees could counteract the benefits of extra help, which, depending on the situation, could put you back right where you started.

The optimal solution
So, what do you do?

For most people, the optimal solution would be to put your savings in a diversified portfolio of low-cost index funds. These cheap funds track known indexes, which means that both the fees you see, like the expense ratio, and the ones you don’t, like trading costs, are lower.

Not convinced? Morningstar, which rates mutual funds, found that low fees are the best indicator of long-term mutual fund performance. The Morningstar rating beat the expense ratio as a predictor of performance less than 50% of the time.

In other words, the fund-rating expert is saying that if you want to find a great long-term performer, look at cost first, and its proprietary rating second.

So, for the best long-term performance, go low-cost, diversify, and don’t trade a lot.

But there’s theory, and then there’s practice
However, not all of us have the patience, energy, and stomach for this kind of investing. That’s just a reality.

If you struggle to save, find the whole process stressful and confusing, or are sorely tempted to trade every time something happens in the market, you might benefit from extra help.

This is where managed accounts might start to make sense. The GAO found that managed account participants do tend to have better diversification and higher savings rates, implying that these managers do add some value and get more out of their accounts. You might not perform as well as the best-case scenario, but you might very well outperform the realistic scenario.

Making it work
Think practically about what you struggle with when it comes to your 401(k). If you want to take the investment process out of your hands entirely, you might want to consider a managed account or target-date fund. Compare the costs and try to size up the pros and cons, and go from there.

If you’re looking for help and guidance, a managed account might also offer you support, but you might find it through your 401(k)’s designated advisor, if you have one, or from an outside financial planner. Fee-only financial planners can do portfolio assessments for you and have no strings attached or conflicts of interest, so that’s a possible route. If you decide you’d like holistic help, a full-service financial advisor might be a good option.

Of course, you pay for these services. In the strictest sense of investment performance, they might not be worth it — but if you are struggling on your own or making a lot of investment mistakes, they might very well be worth it to you.

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