A Managed Account Offers Optimization and Tax Efficiency

A financial adviser sits with a smiling couple at their kitchen table and shows them financial figures in paperwork.

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published 22 August 2023

Editor’s note: This is part two of a five-part series on supplemental income streams in retirement. Part one, Could Supplemental Income Strategies Work for Your Retirement?, is an introduction to the series. Part three is Annuities Provide Peace of Mind and Lifetime Income. Part four is Three Investments That Put Your Money to Work With Less Risk. Part five is That Cash in Your Emergency Fund Doesn't Have to Be Idle.

There may be no greater financial comfort than the ability to sit back and have your money work for you. But as you approach retirement, there’s special emphasis on making sure you have predictable income to support the lifestyle for which you’ve worked.

Investing in managed accounts may be an option for supplementing income from a retirement account or Social Security and can consist of a portfolio of investments in stocks, bonds, professionally managed models or liquid/illiquid alternative investments such as private equity, private credit, hedge funds or real assets.

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Managed accounts are designed to help meet your specific investment and income goals with risk tolerance in mind. The name comes from the professionally managed approach — often involving multiple teams dedicated to areas like researching underlying investments, constructing the overall portfolio or servicing your account. Typically, the manager will have discretion to purchase and sell assets with a fiduciary obligation to act in your best interest, including rebalancing the account periodically.

As with other investments, a managed account may not be right for all individuals. There are associated benefits, risks and costs to keep in mind. For example, ongoing fees are charged regardless of performance and are likely to be higher than a buy-and-hold investment strategy. Notably, this type of investing typically involves market risk, which means returns may vary across different time periods, due to factors such as economic conditions.

Managed accounts can help provide growth and income

Your financial adviser can help determine if a managed account is right for you and what kind of investment mix may be most beneficial. The mix likely will be diversified across a wide variety of asset classes to optimize the risk and return characteristics of the investments in the context of your risk appetite. Your financial adviser may further personalize the portfolio to your specific preferences or objectives, such as generating higher yield or aligning to your values.

Importantly, managed accounts can be set up to help provide growth and income, both of which depend on the performance of investments in the account. Distributions of dividends or interest generated from the underlying investments can be used as supplemental income or reinvested back into the program to purchase additional assets.

In addition, the principal investment and any potential gains are typically available and often used as part of a total return strategy, whereby systematic withdrawals from the account balance are used to help satisfy income needs.

Furthermore, transactions in a managed account are often timed by the fund manager at specific intervals to help limit tax consequences, with more customized strategies coordinating your income needs with your tax concerns across a variety of accounts.

Managed accounts can be particularly attractive if you have a higher risk tolerance in retirement, as capital appreciation can be a significant factor in supporting your future cash flow needs, particularly when considering the effect inflation can have on your purchasing power. When funds perform well, you may be able to sustain higher distributions over your lifetime.

Conversely, more aggressive managed accounts that may rely more heavily on stock performance, can be riskier investments in periods of economic volatility — presenting short-term money losses for investors based on market conditions.

Poor returns early on can have adverse effects

The potential for an investment like a managed account to produce poor returns in the near term while you are drawing income from it may harm your overall rate of return in the future, even if the investments appreciate over time. This is because the money withdrawn won’t participate when markets turn around. This is known as sequence of returns risk, and the size of your withdrawals plays a role in how this risk may affect your retirement spending goals.

While investing your retirement assets in a managed account may be an effective way to outpace inflation, a financial adviser can help you determine if you’ll have the cash to be able to support your lifestyle in the event of short-term losses referenced above.

More personalized managed account programs often come with services like financial planning, which can include an analysis of your situation whereby a financial adviser may consider sequence of returns among other risks in modeling different market conditions with your retirement spending objectives and other unique circumstances.

To summarize, the advantages of managed accounts include:

Professional investment selection and account management
Asset allocation and diversification to help balance risk and return opportunities
Potential for higher returns based on account performance and market conditions
Active advice personalized to the investor’s specific risk tolerance and needs such as income or tax management
Automated rebalancing to help ensure that the investments align with your risk appetite, goals and objectives

The potential drawbacks of managed accounts include:

Susceptibility to market conditions (depending on the investment mix)
Ongoing fees may be higher than a one-time commission over time

As a stand-alone, total return approach or in tandem with other accounts, a managed account may help increase the potential for your retirement assets to meet your retirement goals. With a little homework and help from a financial adviser, you can consider whether a managed account is an effective way to supplement your income in retirement.

The other articles in this series:
Part one: Could Supplemental Income Strategies Work for Your Retirement?
Part three: Annuities Provide Peace of Mind and Lifetime Income
Part four: Three Investments That Put Your Money to Work With Less Risk
Part five: That Cash in Your Emergency Fund Doesn't Have to Be Idle

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Rich Guerrini is the President and Chief Executive Officer of PNC Investments. In his role, he is responsible for all sales, operations, risk and compliance activities for the retail investments organization. Prior to his current responsibilities, Guerrini was Executive Vice President and Managing Director of Alternative Investments for PNC Investments and was responsible for development and rollout of the PNC Investment Center and PNC’s web-based investment offering.