Chapter 25: Fee-based accounts

Question 1

what are the 2 categorie of fee-based accounts?

Answer 1

• Managed and non-managed accounts

Question 2

what is managed account?

Answer 2

have licensed portfolio managers make investment decisions at their discretion and execute them

Question 3

What are the features of managed accounts?

Answer 3

• Professional investment management
• Assets within the account held exclusively for the client
• A package of services
• Services beyond investment management
• An investment policy statement
• Greater transparency

Question 4

what are the types of managed account from simple to sophistication?

Answer 4

1. Mutual funds wraps and exchange-traded fund wraps
2. advisor-managed accounts
3. Separately managed accounts
4. household account
5. private family office

Question 5

what are The most basic services offered within managed accounts?

Answer 5

exchange-traded fund (ETF) wraps and mutual fund wraps.

Question 6

What are exchange-traded fund (ETF) wraps?

Answer 6

often directed by a single portfolio manager who creates the model for a specific managed account. The managed account holds a basket of ETFs for security selection. The underlying ETFs tend to be passive in the investment management. The added value comes from the asset allocation and the geographic, currency, and sector selectionoften directed by a single portfolio manager who creates the model for a specific managed account. The managed account holds a basket of ETFs for security selection. The underlying ETFs tend to be passive in the investment management. The added value comes from the asset allocation and the geographic, currency, and sector selection

Question 7

What is passive approach of ETF wraps?

Answer 7

The portfolio manager determines the client’s risk tolerance, then sets the optimal asset allocation and establishes the portfolio, with ongoing rebalancing back to the set asset mix

Question 8

What is active approach of ETF wraps?

Answer 8

The portfolio manager again determines the client’s long-term risk tolerance, but then applies a short-term tactical approach by actively overweighting or underweighting the sector and the client’s asset allocation. The manager has greater discretion in rebalancing the portfolio to take advantage of changing market conditions

Question 9

What are the advantage of active approach?

Answer 9

• Low fee
• Expert evaluation for the best suit
• A selection of standardized asset allocation models is available to meet the many needs of investors
• There is greater ability to hedge currency exposure within the portfolio, given the choice of hedged or unhedged
  ETFs.
• Because the portfolio manager researches and trades securities daily, the advisor can focus more time on financial planning, estate management, and other wealth management services.
• The firm normally provides its advisors with marketing support

Question 10

What are mutual fund wraps?

Answer 10

• are established with a selection of individual funds managed within a client’s account or accounts. Mutual fund wraps differ from funds of funds because clients hold the actual funds within their account.
• The composition and weighting of individual funds within the account are directed by an overlay manager

Question 11

What is overlay manager?

Answer 11

he investment management of the underlying funds is conducted by sub-advisors. Overlay managers play an active role by rebalancing the client’s holdings back to their target asset mix, or by adding and removing funds based on the quality of the investment management or their views on the market.

Question 12

What are the advantage of mutual fund wraps?

Answer 12

• A coordinated investment account optimized on the asset allocation and selection of managers.
• A selection of standardized asset allocation models to meet the many needs of investors.
• The ability to hedge currency exposure within the portfolio, given the choice of hedged or unhedged
mutual funds.
• Ongoing oversight management of the funds.

Question 13

What is adviser-managed accounts?

Answer 13

advisor-managed accounts give discretion to another person to make investment decisions on the client’s behalf. The advisor who services this type of account also manages its investments and must be licensed as a portfolio manager. The actual securities are held within the client’s account in amounts that follow the advisor’s portfolio model.

Question 14

What are the advantage of adviser-managed accounts?

Answer 14

• The cost may be lower because no other parties are involved with the account.
• The advisor understands the specific client’s needs and applies a tailored investment management approach.
• Some programs permit client accounts to exclude certain securities.
• In some cases, the program allows for tax loss selling.

Question 15

what are the two types of program from advisor as portfolio managers in adviser-managed accounts?

Answer 15

1. Model-based account management (These programs tend to use model portfolios, which are applied to similar clients but tailored to the needs of the specific client. With many models to select from, some customization for unique needs can be applied)
2. Non-model-based account management. (These programs are typically used temporarily when clients are unwilling or unable to tend to their own accounts. They are used, for example, when clients are ill or absent from the country. Given the short-term nature of the programs, the advisors tend not to use a model portfolio. Instead, they simply monitor an existing account of securities)

Question 16

What is SEPARATELY MANAGED ACCOUNTS (SMA)?

Answer 16

With this type of account, the external portfolio manager (called the sub-advisor) controls the holdings based on a
portfolio model.
As the sub-advisor makes investment decisions, the actual securities are debited and credited to the client’s dedicated account within the firm. Because the client holds the underlying securities, the portfolio models can be set to exclude investments or sectors in which the client prefers not to invest. In addition, each investor’s distinctive tax situation can be taken into consideration. Even though the sub-advisors manage hundreds of client accounts, their clients are able to tailor their holdings because they are held separate from all other clients’ investments.

Question 17

What are the advantages of SEPARATELY MANAGED ACCOUNTS (SMA)?

Answer 17

• They provide access to dedicated and sophisticated external portfolio managers.
• Supplemental reports collectively report on the performance of each separate account. The performance is specific to the investor and to other factors in the holdings. Reports show when the holdings are purchased and sold, and when specific securities are deposited to and withdrawn from the accounts.
• The client directly holds the securities in an SMA, whereas assets in a fund run by external portfolio managers are pooled. This key difference means that the needs and wants of investors with SMAs can be catered to separately.

Question 18

What are the mandate of SMA?

Answer 18

can be either a single-mandate or a multi-mandate managed account, also called a unified managed account (UMA)

Question 19

What are single-mandate separately managed accounts?

Answer 19

Single-mandate managed accounts are directed by a single portfolio manager (or team of managers)
Some programs permit clients to exclude securities they do not wish to invest in for ethical, social, or other reasons. Clients also benefit from the manager’s use of tax loss selling.
The key advantage of these accounts is that they can offer clients access to dedicated and sophisticated institutional portfolio managers while maintaining a relationship with their advisor.
The challenge occurs when two mandates are required to meet a client’s investment objective. In such cases, each objective would require a separate account to house that portfolio manager’s model. In addition, investors cannot co-mingle non-managed stocks or bonds in a managed account that is dedicated to a specific mandate.

Question 20

What are multi-mandate separately managed accounts?

Answer 20

With multi-mandate managed accounts, the overlay manager consolidates a client’s investments within a collection of dedicated accounts (the UMA) and provides oversight. The UMA reflects the optimal asset mix that best mitigates risk, while helping to attain the client’s overall investment objectives. It offers clients and their advisors more choice in terms of products and services in one account. These accounts provide access to a dedicated group of sophisticated institutional portfolio managers, who are considered sub-advisors to the overlay manager

Question 21

What is the ROLE OF THE OVERLAY MANAGER IN A MULTI-MANDATE MANAGED ACCOUNT?

Answer 21

• They conduct ongoing due diligence reviews of each of the underlying portfolio managers (the sub-advisors). As managers of managers, they set the evaluation metrics for ongoing evaluations, evaluate new managers, and remove poorly performing managers from the program.
• They set the overall optimal asset mix and the proportions for each sub-advisor, which allows the advisors to maximize performance and mitigate risk for each client. Clients can also customize the investment portfolio to suit their needs as they move through the various life stages. The customized asset mix is then administered by the overlay manager.
• They conduct ongoing monitoring of the client’s investments and the composition of the overall investment portfolio.
• They coordinate the efforts of the sub-advisors and sometimes conduct rebalancing.
• They provide market insight to advisors and coordinate the views of the sub-advisors. They also reflect on the
broader picture of the markets and convey this knowledge to the advisors and their clients.

Question 22

What is the advantage of multi-manager accounts?

Answer 22

is the direct access clients have to a dedicated and sophisticated group of industry professionals. For clients, this access provides a coordinated approach to managing their assets in one account. More importantly, however, it allows advisors to change their business model. They can redirect time previously spent on research and security selection to focus on the complex wealth management needs of their high-net-worth clients. The fees for multi-manager accounts cover the underlying investment management, the oversight functions of the overlay manager, custody, and the various aspects of wealth management and financial planning.

Question 23

What is household accounts?

Answer 23

Household accounts are a type of separately managed account that involve the coordination of holdings across a family or household. In this approach, one overall portfolio model is used to coordinate investment management within and across accounts for the family or the household. This application can provide better tax management and inclusion of all of the holdings, regardless of size or format of the account. In a Canadian setting, the ideal account would take a balanced portfolio model and allocate the fixed-income position within a registered retirement savings plan, the equities in a Canadian cash account, and the international equities in a U.S. cash account

Question 24

What is private family office?

Answer 24

A private family office is an extension of the advisor-managed approach. In this approach, instead of having only one advisor, a team of professionals handles all of a high-net-worth client’s financial affairs within one central location. The client’s portfolio may include investments, trust and estates, philanthropy, corporate planning, tax planning and filing, legal work, and basic account servicing, including bill paying and other services. The investment management is unique for each family. This account is managed by institutional portfolio managers, similar to the managing of pensions. Generally, access to a family office is for clients with more than $50 million in an account. Typically, this service is conducted for a fee on the assets under management

Question 25

What are the advantage of private family office?

Answer 25

- High-net-worth clients are completely free to concentrate on matters other than their financial affairs. - Given that all professionals are concentrated in one service, they are aligned with the recommendations on the client’s investments, taxes, legal matters, estate, and corporate needs

Question 26

What are the documents needed for managed account?

Answer 26

- the client must sign a managed account agreement, and the dealer member’s designated supervisor must accept it. The managed account agreement must also clearly indicate the client’s investment objectives for this account. Furthermore, the client must be provided with a copy of the dealer member’s procedures to ensure the fair allocation of investment opportunities among managed accounts. - Each managed account must be reviewed on a quarterly basis by a designated supervisor to ensure that the investment objectives of the client are diligently pursued. Moreover, the managed account must be conducted in accordance with the applicable regulations. Reviews may be conducted on an aggregate basis, where decisions are made centrally and applied across a number of accounts. For discretionary and managed accounts, both the client and dealer may terminate the account agreement as long as the request is submitted in writing. Clients may terminate the agreement at any time, but if the dealer member is terminating the agreement, the client must be given at least 30 days’ notice.

Question 27

What are the types of non-managed fee based accounts?

Answer 27

1. Full-service brokerage accounts. | 2. Self-directed brokerage accounts.

Question 28

What are Full-service brokerage accounts?

Answer 28

provide clients with financial planning services, combined with a fixed or unlimited number of trades. The services are bundled under a fee charged on the client’s assets under management. Fees range from 1.0% to 2.5% of the assets under management. In most cases, the annual fee is paid quarterly out of cash held in the account. The amount depends on the following criteria: • Dollar size of account • Estimated number of trades • Type of investment (e.g., equity, bond, money market, mutual fund, or guaranteed investment certificate) • Ancillary services provided (e.g., financial planning, estate planning, and wealth management) Some investment dealers offer two levels of fee-based accounts. The higher level typically offers more, or unlimited, free trading.

Question 29

What are Self-directed brokerage accounts?

Answer 29

In recent years, self-directed brokerage firms have begun to offer fee-based accounts. In the past, these firms provided online trading at lower cost for accounts of all sizes. The new fee-based model builds on this base by servicing lower minimum account sizes, often at a lower cost. The firms are able to provide this service by changing the advisor’s role from the traditional one-to-one approach to a one-to-many, technology-based model. This area of service is new and evolving. Not all self-directed brokerage firms currently offer these services, and the programs they do offer differ from firm to firm. • Direct security and asset mix guidance • Robo-advisory services

Question 30

What are the categories of Self-directed brokerage accounts?

Answer 30

* Direct security and asset mix guidance | * Robo-advisory services

Question 31

What is Direct security and asset mix guidance?

Answer 31

Investors using the direct guidance model are provided with the following bundled services: • Unlimited trading • Tools to build and monitor an asset allocation • Investment recommendations, alerts, and reminders provided by a research program or provider This service is targeted at investors who want advice from an investment advisor but do not require financial planning, wealth management, or other full-service offerings. This approach is more expensive than traditional self- directed investment, given the added level of support. However, it still provides a cost efficient alternative, because trading and account costs are included in the package.

Question 32

What is robot-advisory service?

Answer 32

The term robo-advisor describes a recent investment model. Currently, this one-to-many service builds on the concept of ETF wraps, using those securities to build an asset mix. The key difference is that the role of the advisor is done remotely and mostly online

Question 33

What are the advantages of robot-advisory service?

Answer 33

They cost less than traditional managed accounts because support and advice are provided on a one-to-many basis. In addition, the services use low-cost ETFs to build an asset mix. • Many investors (particularly young investors) prefer online services over the traditional relationship-based model. • Minimum account sizes are lower.

Question 34

What are the disadvantages of robot-advisory service?

Answer 34

• The one-to-many service approach may not appeal to high-net-worth investors. • Financial planning and wealth management services are often supported by technology that is in the early stages of development. • Local service is limited; service for the most part is provided online. • Because the service is new and evolving, it has not gone through a major market correction.