Chapter 25 Fee-Based Accounts RQ Flashcards
A client holds a passively managed ETF wrap account. Due to market declines, the account has diverged from the set asset allocation. The manager anticipates market increases in the oil and gas sector in the next three months. Determine the action the portfolio manager will take in the wrap account?
A. None.
B. Rebalancing to the original asset allocation.
C. Actively overweighting in the oil and gas sector.
D. Increasing cash to take advantage of upcoming investment opportunities.
B. Rebalancing to the original asset allocation.
With the passive approach to an ETF wrap account, a client’s risk tolerance is derived, and the portfolio manager sets the optimal asset allocation, establishing the portfolio with ongoing rebalancing back to the set asset mix. It is only with the active approach that the portfolio manager can apply a short-term tactical approach by actively overweighting or underweighting a sector and altering the client’s asset allocation in the short term to take advantage of market conditions.
Identify who directs the composition and weighting of individual funds in a mutual fund wrap.
A. Client.
B. Sub-advisor.
C. Overlay manager.
D. Investment advisor.
C. Overlay manager.
In a mutual fund wrap, the composition and weighting of individual funds within the account are directed by the overlay manager, while the investment management of the underlying funds is conducted by the sub-advisors. The overlay manager will take an active role by rebalancing the client’s holdings back to their target asset mix or by adding and removing funds to the quality of the investment management.
What is the primary disadvantage of single-mandate managed accounts?
A. Need for multiple accounts for separate mandates.
B. Increased trading costs.
C. Lack of regulatory oversight.
D. Minimal range of available securities.
A. Need for multiple accounts for separate mandates.
If two managers are required to meet a client’s investment objective, 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.
Select a key advantage of a separately managed account.
A. Low minimum account size.
B. The client directly holds the securities in the account.
C. Uniform investment policy for all clients.
D. A single manager responsible for the entire account and investment policy.
B. The client directly holds the securities in the account.
Separately managed accounts have several key advantages: They provide access to dedicated and sophisticated external portfolio managers, and the client directly holds the securities in a 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 separately managed accounts can be catered to separately.
An individual with a net worth of $75 million wishes to minimize her travel time and time spent coordinating the activities of the various individuals who work with her financial affairs. Recommend a type of managed account arrangement.
A. Multi-disciplinary account.
B. Unified managed household.
C. Private family office.
D. Separately managed account.
C. Private family office.
A private family office is an extension of the client servicing approach of advisors. In this approach, instead of one advisor there is a team of professionals within one central location that handles all of an affluent client’s financial affairs; including: investments, trust and estates, philanthropy, corporate planning, tax planning and filing, legal work, account servicing including bill paying, etc.
Select the type of managed account that would provide a client with access to sophisticated portfolio managers overseen by another expert portfolio manager of record responsible for monitoring performance and setting the investment mix.
A. Manager of managers.
B. Proprietary managed program.
C. Advisor’s model portfolio.
D. Multi-mandate account.
D. Multi-mandate account.
Multi-mandate accounts provide access to a dedicated group of sophisticated institutional portfolio managers, who are considered sub-advisors to the overlay manager. These managers often align clients with two or more portfolio models, with each model representing a component of the client’s greater diversified holdings.
Which client would be the most likely prospect for a managed fee-based account?
A. Najim, age 28, assets available for investment $125,000.
B. John, age 25, assets available for investment $25,000.
C. Mary, age 35, assets available for investment $75,000.
D. Gareth, age 50, assets available for investment $85,000.
A. Najim, age 28, assets available for investment $125,000.
Managed fee-based accounts are primarily utilized by affluent or high-net-worth individuals. Based on the assets available for investment, only Najim would have sufficient assets to be a likely prospect for this arrangement. The fees would be likely prohibitive for the smaller asset accounts of the other individuals.
Which client is least likely to benefit from a fee-based account?
A. Jacqueline, who trades equities in her RRSP.
B. David, who buys and holds mutual funds.
C. Sara, who actively trades Canadian listed securities.
D. Kumail, who trades fixed-income securities based on interest rate predictions.
B. David, who buys and holds mutual funds.
David is holding mutual funds in his account, which already have MERs and potentially other fees applied to the product. He does not actively trade, which means that he will not likely benefit from the “packaged” trading fees typically included in a fee-based account. The other individuals do actively trade, meaning that they could benefit from the packaged approach.
Identify a key function of the overlay manager.
A. Coordinating reporting to clients.
B. Authorizing all investment transactions.
C. Conduct ongoing due diligence of each of the sub-advisors.
D. Liaising between the investment firm and regulatory authorities.
C. Conduct ongoing due diligence of each of the sub-advisors.
One of the key functions of the overlay manager is to 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.
Choose the type of license that must be held by an advisor who is servicing an advisor-managed account.
A. Partner or director.
B. Portfolio manager.
C. Registered representative.
D. Mutual funds sales representative.
B. Portfolio manager.
With these types of accounts, the advisors that are providing the account servicing also provide the investment management. They are required to be licensed as portfolio managers to make the investment decisions on behalf of their clients.
Identify the type of managed account that maximizes an affluent client’s ability to customize his or her relationship with an investment firm.
A. Private family office.
B. Multi-disciplinary account.
C. Separately managed account.
D. Unified managed household.
A. Private family office.
The Private Family Office is the ultimate arrangement for affluent clients. In this arrangement, clients are able to tailor their service providers and the services provided to their specific needs, and can include a variety of professionals including lawyers, investment specialists, financial planners, tax specialists, and more.
Danielle’s long-standing client, Nuriam, is currently travelling extensively and does not want to monitor her investments. Danielle acts as portfolio manager for Nuriam’s advisor-managed account. Select an option that Danielle can offer Nuriam within the advisor-managed account framework.
A. Private home office.
B. Exchange-Traded Fund wrap.
C. Non-model-based discretionary account management.
D. Self-directed brokerage account.
C. Non-model-based discretionary account management.
Non-model-based discretionary account management is a type of advisor-managed account typically used temporarily when clients are unwilling or unable to attend 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.
Lee-Hin is an experienced investor with a self-directed investment account. She is interested in security and asset-mix advice without financial planning services, and wishes to have a fee-based account with her trading and account costs included in the fee. Determine an account type that would meet Lee-Hin’s needs.
A. Robo-advisory account.
B. Advisor-managed account.
C. Separately managed account.
D. Direct security and asset mix guidance account.
D. Direct security and asset mix guidance account.
Lee-Hin could utilize a direct security and asset mix guidance account. 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.
Andrei is an Investment Advisor. He has several clients with simple discretionary accounts for which he makes investment recommendations. Identify the requirement for Andrei’s recommendations to be implemented.
A. Approval from designated supervisor.
B. Client written approval for trades.
C. Investment in managed products only.
D. In compliance with Investment Policy Statement.
A. Approval from designated supervisor.
According to IIROC rules, investment advisors (IAs) may make investment recommendations for simple discretionary accounts. However, the decision to implement the recommendation rests with the designated supervisor, and the IA receives written approval from the designated supervisor prior to carrying out the recommendation.
Identify a managed account arrangement that allows a family or household to coordinate all of their investment management for all investment accounts regardless of size or type.
A. Private family account.
B. Household account.
C. Multi-mandate managed account.
D. Model-based account management.25 – Fee-Based Accounts
B. Household account.
The household account structure is an arrangement where 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.
