Separate account: Overview, definition, and example
What is a separate account?
A separate account is a type of investment account in which the assets are managed and held separately from the assets of the managing entity or other clients. This account structure is commonly used in financial services, such as insurance, investment management, or retirement planning, where individual clients have their own designated assets that are not commingled with other clients’ funds. Separate accounts are typically used for personalized investment strategies, ensuring that the client’s funds are invested according to their specific preferences, objectives, and risk tolerance.
Why is a separate account important?
A separate account is important because it provides clients with a higher level of control, transparency, and protection over their investments. Since the assets are kept separate from the assets of other clients or the managing entity, clients have a clearer view of how their funds are being used and can be assured that their investments are distinct. Additionally, separate accounts may allow for customized investment strategies that are tailored to the individual client’s needs, goals, and risk profile. For institutional investors, such as pension funds or endowments, separate accounts offer a way to manage large, specialized portfolios without pooling funds with other investors.
Understanding separate account through an example
Imagine a high-net-worth individual who wants to invest in a diversified portfolio of stocks and bonds but has specific preferences, such as avoiding certain industries or prioritizing sustainable investments. They choose to open a separate account with a financial advisor. The advisor manages this account solely on behalf of the individual, ensuring that the assets are invested according to the client’s specific instructions and preferences, without commingling those assets with other clients’ funds. This provides the individual with customized investment management and the assurance that their assets are managed separately.
In another example, a pension fund may open a separate account with an investment management firm to manage its assets. The pension fund’s assets are kept in a distinct account, separate from the firm’s own assets or the assets of other clients. This allows the pension fund to have a more tailored investment strategy and greater oversight of how its funds are managed.
An example of separate account clause
Here’s how a separate account clause might appear in a contract:
“The Manager agrees to maintain a separate account for the Client, wherein the Client’s assets will be held and invested exclusively according to the Client’s instructions. The assets in the separate account will not be commingled with other client assets, and the Client will have full transparency regarding the investment strategy and performance of the account.”
Conclusion
A separate account is a useful financial tool for clients who want personalized investment management and control over their assets. By ensuring that assets are held and managed separately, this account structure provides greater transparency, customization, and protection. It is commonly used in various financial and investment contexts to meet the specific needs of individual clients or institutions, offering them a tailored approach to asset management.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.