Investors have plenty of vehicles to choose from when it comes to the outsourcing of stock selection and portfolio maintenance.

Managed funds and listed investment companies have long dominated the space, with a number of high-quality offerings delivering track records stretching back decades.

More recently exchange traded funds, or ETFs, which first began trading on the ASX 15 years ago, are often mentioned as a growing force. But did you know that managed accounts, which get fair less air play, have attracted $28 billion in funds under management compared to the $24 billion in ETFs?

So what are managed accounts and how do they differ from the other better known options?

Each investment structure has its advantages and disadvantages but in our view managed accounts have the most advantages and the fewest disadvantages.

One of the main reasons for this is because all the other structures are pooled arrangements which can provide sub-optimal tax consequences.

Managed funds are still the most popular structure for delivering investment management services to Australians by a long shot, collectively amounting to about $1 trillion in assets.

The fund owns the underlying assets, and the investors receive units in the trust proportional to the amount they contributed. Most of these funds apply a management fee of 0.75 to 1.75 per cent.

Managed funds can provide the investor with exposure to difficult to access asset classes or strategies but there are key disadvantages to the structure.

Firstly, new investors in a fund may inherit an imbedded tax liability on capital gains they did not participate in and that liability is unknown upon entry to the fund. There are also tax consequences for the underlying transactions that occur when a fund manager rebalances the fund.

To avoid these tax obligations, the investor may look to other structures such as an LIC. They are also pooled investment vehicles, but there are significant differences.

The main difference is that the LIC is a listed company on the stock exchange, and investors buy shares of the LIC as they would a company.

Tax is paid at the company level for an LIC, meaning franking credits for investors, and gains are distributed as dividends or held within the company as retained earnings.

Like managed funds, LICs may contain an embedded capital gain.

Arguably the greatest issue with LICs is their tendency to trade below Net Asset Value.

This brings us to ETFs. ETFs are open-ended unit trusts listed on the stock exchange providing exposure to an underlying investment portfolio.

Purchases and sales are implemented in the same manner as listed shares.

Management fees for ETFs begin at less than 0.30 per cent for Australian equity index products, as low as 0.07 per cent for US equities, and can exceed 1 per cent for other types of offerings for more exotic strategies.

ETF products tend to offer passive (i.e. index based) strategies in which portfolio turnover is low, reducing tax events such as realised capital gains and losses. Embedded capital gains do not build up to the same extent as in managed funds, but many of the challenges that managed funds experience are shared by ETFs.

Now we come to managed accounts which are investment portfolios where the investor maintains direct ownership of an investment portfolio, managed in accordance with a set investment strategy.

They can be structured in two different forms, Separately Managed Accounts (SMAs) and Individually Managed Accounts (IMAs). Management fees generally range from 1 per cent to 1.7 per cent.

The manager of an SMA builds a model portfolio comprising their investment selections and relative weightings. Any change in the model portfolio will result in corresponding changes in each of the managed accounts.

There is no embedded tax liability within managed account structures and investors do not realise tax consequences as others enter or leave the scheme.

The assets are not pooled, so the actions of other investors do not affect all investors. Investors may also transfer in an existing portfolio without having to liquidate all positions and potentially incur a capital gains tax.

Investors may terminate the manager and leave the scheme without being forced to liquidate the positions and incur tax events, and the level of transparency in the structure allows assessment of the manager's transactions, holdings, tax efficiency, fees & expenses, and sources of return.

Investors can also restrict or exclude holdings in specific securities, with cash being commonly held in lieu of the excluded securities.

Like SMAs, IMAs provide investors with direct ownership of their portfolios but they do not use a model portfolio.

Fund managers build and manage an investment portfolio based on the manager's core portfolio of stocks and tailored to the individual objectives and tax positions of each investor. Therefore, the investment portfolio and management decisions will be tailored for each investor.

A unique benefit is that IMAs are formally a service offering rather than a financial product and the management fees may be tax deductible.

For an IMA with $10m in assets (which is not uncommon), tax deductibility can mean a saving of hundreds of thousands of dollars.

While a SMA will require a minimum investment starting at about $25,000, an IMA will require a much higher minimum investment of about $250,000 but can range up to $5 million.

Increased regulation has been identified as a catalyst for the take-up of managed accounts.

This change in legislation has driven dealer groups to reshape the value chain by focusing on product packaging to assist with lost revenue from rebates. They are shifting their clients into managed accounts and picking up a 20-30bps product packaging fee, which is roughly the amount lost under recent reforms.

There is also growing demand for transparency from investors and managed accounts offer beneficial ownership of assets, transparency and tax planning advantages.

Managed accounts are also proving to be relatively cost efficient as much of the back end paperwork is outsourced by the planner to investment professionals backed by an admin platform.

Hugh MacNally is chairman and founder of Private Portfolio Managers, a specialist investment manager