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25.5 Summary

Overview of key aspects and frequently asked questions about fee-based accounts including their types, services offered, and regulatory requirements.

SUMMARY

In this chapter, we discussed the following key aspects of fee-based accounts:

Key Aspects of Fee-Based Accounts

  • Fee-Based Account Model: This model bundles various services and charges a fee based on the client’s assets under management (AUM). Typically, these accounts are owned by high-net-worth clients. The two broad categories are managed accounts and non-managed accounts.

Managed Fee-Based Accounts

  • Professional Portfolio Management: Managed accounts offer professional portfolio management services, with the manager having discretionary authority.
  • Bundled Fees: These accounts typically charge a bundled fee to cover the various included services.
Types of Managed Fee-Based Accounts
  1. Mutual Fund and ETF Wraps: These are the most basic services within managed accounts, focusing on asset allocation and selection across different geographic, currency, and sector areas.

    • ETF Wraps: Underlying ETFs tend to be passive, with added value coming from asset allocation.
    • Mutual Fund Wraps: Involves establishing a separate account for clients, holding selected individual funds.
  2. Advisor-Managed Accounts: The advisor is a licensed portfolio manager who manages the client’s investments, directly focusing on their area of expertise.

  3. Separately Managed Accounts (SMAs): An external portfolio manager (sub-advisor) manages the client’s investments held directly in their individual accounts. These allow for tailored holdings separate from other clients’ investments.

  4. Household Accounts: Coordinating holdings across a high-net-worth family or household.

  5. Private Family Office Accounts: A team of professionals handles all of a high-net-worth client’s financial affairs within one central location.

Regulatory Requirements for Managed Accounts

  • Discretionary authority must be granted by the client in writing and accepted in writing by the designated supervisor.

Non-Managed Fee-Based Accounts

  • Full-Service Brokerage Accounts: Offer financial planning services combined with a fixed or unlimited number of trades.
  • Self-Directed Accounts: These fall into two categories:
    1. Direct Guidance: Provides advice from an investment advisor without additional financial planning or wealth management services.
    2. Robo-Advisory Services: Utilize ETFs to build an asset mix, with advisory mostly conducted online.

REVIEW QUESTIONS

Now that you have completed this chapter, you should be ready to answer the Chapter 25 Review Questions.

FREQUENTLY ASKED QUESTIONS

If you have any questions about this chapter, you may find answers in the online Chapter 25 FAQs.

Glossary and Definitions

  • Fee-Based Account: A model where clients pay a fee based on their assets under management rather than per transaction.
  • Managed Accounts: Accounts where a portfolio manager has discretionary authority over investments.
  • Non-Managed Accounts: Accounts where clients make their own investment decisions without discretionary authority given to a manager.
  • ETF Wrap: A service where ETFs are used to build a portfolio, focusing on asset allocation.
  • SMA (Separately Managed Account): Accounts managed by a portfolio manager, with individual client holdings separated.

Key Takeaways

  • Fee-based accounts bundle services and charge based on AUM, commonly preferred by high-net-worth clients.
  • Managed accounts can offer different levels of portfolio management and customization, while non-managed accounts provide flexibility for self-directed investment.
  • Regulatory compliance is crucial for managed accounts, particularly regarding discretionary authority.
  • Self-directed services, including robo-advisors, provide alternatives for those seeking lower-cost investment management.

Charts and Diagrams

Fee-Based Accounts Structure

    graph TD
	    A[Fee-Based Accounts]
	    A --> B[Managed Accounts]
	    A --> C[Non-Managed Accounts] 
	    B --> D[Mutual Fund & ETF Wraps]
	    B --> E[Advisor-Managed Accounts]
	    B --> F[Separately Managed Accounts (SMAs)]
	    B --> G[Private Family Office Accounts]
	    C --> H[Full-Service Brokerage]
	    C --> I[Self-Directed Accounts]
	    I --> J[Direct Guidance]
	    I --> K[Robo-Advisory Services]

Formula for Fee Calculation

The fee charged in a fee-based account is typically a fixed percentage of the assets under management (AUM). The formula can be represented as:

$$ \text{Annual Fee} = \text{AUM} \times \text{Fee Percentage} $$


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## What is the primary characteristic of a fee-based account model? - [ ] Charging a commission for each trade - [x] Charging a fee based on the client’s assets under management - [ ] Providing free trades without any fee or commission - [ ] Offering only self-directed investment options > **Explanation:** Fee-based accounts bundle various services and charge a fee based on the client's assets under management, rather than per trade. ## Who typically owns fee-based accounts? - [ ] Retail clients with low net worth - [ ] Institutional investors - [x] High-net-worth clients - [ ] Government entities > **Explanation:** Fee-based accounts are typically owned by high-net-worth clients due to the bundling of various services and personalized attention. ## What is a key feature of managed fee-based accounts? - [ ] Non-discretionary authority over the account - [x] Professional portfolio management services - [ ] Self-directed investment options - [ ] No fees involved > **Explanation:** Managed fee-based accounts offer professional portfolio management services and grant discretionary authority to the manager. ## What are mutual fund and ETF wraps known for within managed accounts? - [ ] Active management and high fees - [ ] Holding individual stocks only - [x] Asset allocation, and geographic, currency, and sector selection - [ ] No customization options > **Explanation:** Mutual fund and ETF wraps are known for their asset allocation and the selection of geographic, currency, and sector investments. ## What differentiates a Separately Managed Account (SMA) from other managed accounts? - [ ] Holding investments in pooled accounts - [ ] Only containing mutual funds - [ ] Lack of customization options - [x] Investments held directly in the client’s individual account > **Explanation:** SMAs hold investments directly in each client's individual account, allowing for greater customization compared to pooled accounts. ## What must clients do to grant discretionary authority for managed accounts? - [ ] Notify their bank in person - [x] Provide written consent - [ ] Simply open the account - [ ] Complete a verbal agreement > **Explanation:** Clients must provide written consent to grant discretionary authority, and this must be accepted in writing by the designated supervisor. ## What services are offered in non-managed full-service brokerage accounts? - [ ] Robo-advisory - [ ] Generally lower fees than managed accounts - [x] Financial planning services and a fixed or unlimited number of trades - [ ] Only self-directed trading > **Explanation:** Non-managed full-service brokerage accounts provide financial planning services combined with a fixed or unlimited number of trades. ## What are self-directed fee-based accounts primarily divided into? - [ ] Full-service and private banking - [ ] Robo-advisory and discretionary management - [x] Direct guidance and robo-advisory services - [ ] Mutual fund only > **Explanation:** Self-directed fee-based services are divided into direct guidance, which offers advice without full-service support, and robo-advisory services. ## What role does a robo-advisor play in self-directed fee-based accounts? - [ ] Providing individual stock recommendations - [ ] Managing physical branches - [x] Offering automated investment services using ETFs - [ ] Conducting in-person consultations > **Explanation:** Robo-advisors provide automated investment services using ETFs to create an asset mix and conduct advisory roles primarily online. ## What distinguishes private family office accounts? - [ ] Standard account documentation - [ ] Access to partial financial services - [x] A team of professionals handling all financial affairs in one central location - [ ] Limited to managing mutual funds only > **Explanation:** Private family office accounts involve a team of professionals who handle all financial affairs of high-net-worth clients at one central location.

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Tuesday, July 23, 2024