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25. Fee-based Accounts

Chapter 25 provides a comprehensive overview of fee-based accounts in the Canadian Securities Course, exploring the different types of managed and unmanaged fee-based accounts, along with their advantages and disadvantages.

Fee-Based Accounts 25

Chapter Overview

In this chapter, you will learn about the various types of fee-based accounts, including both managed and unmanaged accounts.

Learning Objectives

  1. Describe the advantages and disadvantages of fee-based accounts.
  2. Compare the features, advantages, and disadvantages of various types of managed fee-based accounts.
  3. Describe the various types of non-managed fee-based accounts.

Content Areas

  • Overview of Fee-Based Accounts
    • Understand the fundamental principles and structures of fee-based accounts.
  • Managed Fee-Based Accounts
    • Explore various managed accounts and their specific features and benefits.
  • Non-Managed Fee-Based Accounts
    • Delve into non-managed accounts and how they differ from managed fee-based accounts.

Key Terms

Glossary of terms defined in this chapter:

  • Discretionary accounts: Investment accounts where the broker or financial advisor makes decisions on behalf of the client.
  • Mutual fund wraps: Investment portfolios consisting primarily of mutual funds, structured under a single encapsulated wrap.
  • Exchange-traded fund wraps: Similar to mutual fund wraps but consist mainly of exchange-traded funds (ETFs).
  • Overlay manager: A managerial role in multi-manager accounts that coordinates the various strategies and attempts to optimize the overall performance.
  • Fee-based accounts: Accounts that charge a flat fee or percentage of assets under management, as opposed to commissions on transactions.
  • Private family office: Financial advisory services tailored specifically for wealthy families managing substantial wealth and investment portfolios.
  • Household account: A comprehensive investment account encompassing multiple family member financial needs under a single named account, simplifying family wealth management.
  • Robo-advisor: Automated platforms that provide financial planning services with minimal human intervention based on algorithms and pre-set software strategies.
  • Managed accounts: Investment accounts professionally managed by financial advisors or portfolio managers.
  • Separately managed accounts (SMA): Accounts managed independently according to specific strategies tailored to each investor.
  • Multi-manager accounts: Accounts utilized by employing multiple managers to diversify investment strategies and reduce risks.
  • Unified managed account (UMA): An investment account drawing multiple asset classes and various investment strategies into one holistic account, often run by an overlay manager.

Section 25.3 Key Takeaways

  • Advantages of Fee-Based Accounts: Such accounts often provide a more transparent and predictable fee structure, better alignment of investor and advisor interests, and typically access to a more personalized investment experience.

  • Disadvantages of Fee-Based Accounts: They may entail higher overall costs in less active accounts and potential challenges in evaluating performance against benchmarks due to the bundles of services and fees.

  • Managed vs. Non-Managed Accounts: Managed accounts can benefit from professional oversight focusing on active management while non-managed accounts depend on the account owner’s decisions, generally leading to lower fees but requiring more involved management.

Frequently Asked Questions (FAQs)

  1. What are fee-based accounts? Fee-based accounts charge a consistent fee based on the assets under management rather than per-transaction fees.

  2. How do managed fee-based accounts differ from non-managed ones? Managed accounts involve professional oversight and strategic management by financial advisors or managers, whereas non-managed accounts require the investor to make all strategic decisions.

  3. What are the benefits of fee-based accounts? Benefits include alignment of the advisor’s interest with the client’s, potentially comprehensive financial services and advice, and avoidance of per-transaction fees.

  4. What roles do overlay managers play in fee-based accounts? Overlay managers coordinate different investment strategies within multi-manager accounts to optimize performance and ensure cohesive management.

Charts and Diagrams

Types of Fee-Based Accounts Diagram

    flowchart TB
	    A[Fee-Based Accounts] --> B[Managed Accounts]
	    A --> C[Non-Managed Accounts]
	    B --> D[Discretionary Accounts]
	    B --> E[Mutual Fund Wraps]
	    B --> F[ETFs Wraps]
	    B --> G[Private Family Office]
	    C --> H[Household Account]
	    C --> I[Robo-advisor]
	    B --> J[Managed Account Types]
	    J --> K[Separately Managed Accounts]
	    J --> L[Multi-Manager Accounts]
	    J --> M[Unified Managed Account]


Key terms have been defined in the glossaries provided and highlighted throughout the chapter in bold text to facilitate understanding and retention of their meaning.

Continuing through the remaining sections, the next chapter part will focus in-depth on managed fee-based accounts, addressing Individual account tailoring and portfolio management strategies.

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Good luck!

## What is the primary focus of Chapter 25 in the Canadian Securities Course? - [ ] Fundamental analysis - [ ] Trading strategies - [x] Fee-based accounts - [ ] Regulatory frameworks > **Explanation:** This chapter focuses on various types of fee-based accounts, both managed and unmanaged. ## Which of the following is NOT a key term introduced in Chapter 25? - [ ] Discretionary accounts - [ ] Mutual fund wraps - [x] Bond yields - [ ] Private family office > **Explanation:** Bond yields are not mentioned in the chapter, while the other options are key terms related to fee-based accounts. ## What are the two main categories of fee-based accounts discussed in Chapter 25? - [x] Managed and non-managed - [ ] Retail and institutional - [ ] Domestic and international - [ ] Short-term and long-term > **Explanation:** The chapter discusses managed and non-managed fee-based accounts. ## Which of the following is a type of managed fee-based account? - [ ] Robo-advisor - [x] Separately managed accounts - [ ] Household account - [ ] Fee-only advising > **Explanation:** Separately managed accounts are a type of managed fee-based account, whereas robo-advisor and household account fall under non-managed accounts. ## What is a 'robo-advisor'? - [ ] An automated financial advisory service that uses algorithms - [ ] A human advisor with advanced computational skills - [x] An automated financial advisory service that uses algorithms to create and manage portfolios - [ ] A type of mutual fund > **Explanation:** A robo-advisor is an automated service that uses algorithms to provide financial advice and manage investment portfolios. ## Which term refers to an account where investment decisions are made by a manager on behalf of the client? - [x] Discretionary account - [ ] Managed account - [ ] Fee-based account - [ ] Household account > **Explanation:** In a discretionary account, the manager makes investment decisions on behalf of the client without requiring prior approval for each transaction. ## What are 'mutual fund wraps'? - [x] A type of fee-based account that invests in a selection of mutual funds - [ ] A type of retirement account - [ ] A portfolio of individual stocks and bonds - [ ] An account primarily focused on ETFs > **Explanation:** Mutual fund wraps are a type of fee-based account where the investments are primarily in mutual funds. ## Which account type often utilizes multiple portfolio managers to diversify strategies and asset allocation? - [ ] Robo-advisor - [x] Multi-manager accounts - [ ] Separately managed accounts - [ ] Household account > **Explanation:** Multi-manager accounts are designed to use multiple portfolio managers to implement diverse investment strategies for better asset allocation. ## What is a primary advantage of fee-based accounts as discussed in the chapter? - [ ] Lower overall fees - [ ] Higher returns guaranteed - [x] Alignment of advisor and client interests through transparent fees - [ ] Complete elimination of market risk > **Explanation:** One primary advantage of fee-based accounts is the alignment of interests between the advisor and client, due to transparent and straightforward fee structures. ## Which feature differentiates a 'private family office' from other fee-based accounts? - [ ] Higher transaction fees - [ ] Focus on high-frequency trading - [x] Comprehensive wealth management services for wealthy families - [ ] Investment in public securities only > **Explanation:** A private family office provides comprehensive wealth management services, often tailored for wealthy families, including tax planning, estate planning, and private investments.

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In this section

  • 25.1 Introduction
    An overview of the evolving fee-based account model in the securities industry, highlighting changes from traditional advisor/client relationships to asset-based fee structures.
  • 25.2 Overview Of Fee-based Accounts
    A comprehensive guide to fee-based accounts highlighting their advantages, disadvantages, and the growing demands of high-net-worth clients.
  • 25.3 Managed Fee-based Accounts
    Comprehensive guide to managed fee-based accounts, comparing their features, advantages, and disadvantages. Includes details on taxation, fee structures, and various service levels within managed fee-based accounts.
    • 25.3.1 Exchange-traded Fund Wraps And Mutual Fund Wraps
      A comprehensive guide to understanding exchange-traded fund (ETF) wraps and mutual fund wraps within managed accounts, explaining their structures, benefits, and management approaches.
    • 25.3.2 Advisor-managed Accounts
      Comprehensive guide on advisor-managed accounts in the Canadian Securities Course. Understand the benefits, types, and tax implications of advisor-managed accounts.
    • 25.3.3 Separately Managed Accounts
      A comprehensive guide to Separately Managed Accounts (SMAs) for Canadian investors. Understand the benefits, management structures, and roles of sub-advisors and overlay managers.
    • 25.3.4 Household Accounts
      Explore Household Accounts in the Canadian Securities landscape, detailing their structure, benefits, and the strategic allocation for optimal tax management across a family’s holdings.
    • 25.3.5 Private Family Office
      Learn about the structure, benefits, and operation of Private Family Offices for high-net-worth individuals.
    • 25.3.6 Documentation For Managed Accounts
      Explore comprehensive documentation for managed accounts, complying with IIROC rules, client agreements, and regular reviews. Learn best practices to ensure fair investment allocation and regulatory compliance.
  • 25.4 Non-managed Fee-based Accounts
    Learn about the different types of non-managed fee-based accounts, understand their characteristics, and uncover their benefits and considerations.
  • 25.5 Summary
    Overview of key aspects and frequently asked questions about fee-based accounts including their types, services offered, and regulatory requirements.
Tuesday, July 23, 2024