Managed Fee-Based Accounts

25.2 Managed Fee-Based Accounts

Managed fee-based accounts provide investors with professional portfolio management for a unified fee, often referred to as a “wrap fee.” These solutions allow clients to delegate investment responsibility to professional portfolio managers under a clearly defined agreement—commonly guided by an Investment Policy Statement (IPS). In practice, the manager may have discretionary authority, meaning they can buy or sell securities on behalf of the client without seeking individualized consent for each trade. This model ensures that portfolios remain dynamically managed in response to market conditions and client objectives, while still adhering to robust regulatory oversight within Canada.

Below, we explore different types of managed fee-based accounts, their benefits, key regulatory considerations, and real-world applications in the Canadian marketplace, accompanied by illustrative examples and best practices. This comprehensive overview will empower you with the knowledge to evaluate and select a structure best suited for your clients’ needs or your own investment objectives.

Overview of Managed Fee-Based Accounts

Managed fee-based accounts, sometimes known as discretionary or advisory programs, bundle several services under a single fee structure. These services may include:

• Portfolio management (discretionary or semi-discretionary)
• Trading costs
• Administrative fees and custody services
• Periodic rebalancing
• Performance reporting and consultations
• Additional planning services such as retirement or estate planning

The uniform fee arrangement contrasts with traditional transaction-based models where each trade generates a separate commission. By centralizing these costs under one fee schedule, managed fee-based accounts offer a more predictable and transparent pricing model, potentially reducing the likelihood of excessive trading and related conflicts of interest.

Discretionary vs. Non-Discretionary Management

Discretionary management is most common in managed fee-based accounts. Under a discretionary setup:

1. The client grants the portfolio manager authority to make trades without seeking approval each time.
2. The manager must act in accordance with the client’s IPS, which outlines investment objectives, risk tolerance, time horizon, and constraints.
3. Strict record-keeping requirements apply; each trade must be justifiable in alignment with the client’s stated goals and objectives.

Non-discretionary managed programs also exist, although they are less common. In a non-discretionary scenario:

1. The portfolio manager recommends trades but must obtain client approval prior to executing any transaction.
2. The client retains final decision-making authority.
3. The manager still provides expert advice, ongoing monitoring, and rebalancing recommendations based on a jointly crafted IPS.

Types of Managed Fee-Based Accounts

Wrap Accounts

Wrap accounts charge an all-inclusive fee (called a “wrap fee”) that covers:

• Investment management services
• Commissions or trading costs
• Administrative fees, including custodial and record-keeping expenses
• Additional services such as financial planning or estate planning in some programs

Clients enjoy a streamlined approach where all fees are consolidated, simplifying billing and reporting. For instance, RBC Dominion Securities offers wrap programs that bundle trading, research, and planning services under one fee. This approach can reduce friction for high-net-worth individuals who prefer consolidated reporting and direct access to a dedicated advisor.

Separately Managed Accounts (SMAs)

SMAs take customization a step further:

• Each investor holds distinct securities—rather than pooling resources in a single fund vehicle.
• A portfolio manager (or sub-advisors) tailors portfolios to each client’s objectives, often accommodating specific constraints (e.g., ethical investment preferences, industry exclusions).
• Fees can be tiered based on the total assets under management (AUM), so clients with larger portfolios sometimes pay a lower percentage fee.

Case Study Example
A retired business owner with $5 million in investable assets may opt for a separately managed account through TD Wealth Private Investment Counsel. The investor wants to exclude energy stocks from their portfolio and maintain a 60% equity/40% fixed-income allocation. With an SMA, the portfolio manager directly adjusts holdings in response to market conditions or the client’s changing circumstances, while respecting the exclusions and targets laid out in the IPS.

Unified Managed Accounts (UMAs)

UMAs consolidate multiple investment products under one administrative account:

• Clients can hold individual securities, mutual funds, exchange-traded funds (ETFs), derivatives, and more.
• Comprehensive performance reports offer a clear view of asset allocation and overall performance.
• A single or tiered fee structure applies to all holdings in the UMA.

This model is especially appealing to investors who desire exposure to various asset classes and management styles without juggling multiple accounts. UMAs can streamline tax reporting and rebalancing for clients who hold both equities and fixed income across various vehicles.

Model Portfolios / Robo-Advisors

Model portfolios and robo-advisors bring algorithmic portfolio construction to managed accounts. Typically:

• The client completes an online questionnaire detailing risk tolerance, return expectations, and time horizon.
• The robo-advisor or digital platform automatically sets an asset allocation and rebalances periodically with minimal human intervention.
• Fees are often lower than traditional discretionary management, appealing to cost-conscious or smaller investors.

Real-world Example
Platforms like Wealthsimple, Nest Wealth, and others in Canada offer model portfolios with fees generally ranging between 0.20%-0.50% annually. These solutions attract clients with simpler profiles or smaller investable assets who still want professional guidance and automated rebalancing.

Benefits and Considerations for Clients

Benefits

1. Professional Management:
   Ongoing oversight by expert portfolio managers who may analyze global macroeconomic factors, industry trends, and individual company fundamentals.

2. Clear Strategy and Rebalancing:
   A well-defined investment strategy, tailored to the client’s objectives, is continuously monitored. Rebalancing is carried out automatically, ensuring the portfolio remains on track.

3. Simplified Fee Structure:
   A single fee encompassing most (if not all) costs offers transparency. The client knows exactly what they are paying for and can more easily compare the total cost across different providers.

4. Customization and Personalization:
   Through options like SMAs, clients can incorporate personal preferences—such as socially responsible investing, tax-sensitive strategies, or other constraints.

Potential Drawbacks

1. Management Fees Can Be Significant:
   While the all-in fee brings simplicity, it may appear higher than a traditional commission-based model, especially if the investor trades infrequently.

2. Manager Selection Risk:
   The client must trust the chosen manager’s expertise and methods. Underperformance remains possible, and the selection process can be daunting.

3. Limited Client Input in Discretionary Arrangements:
   Some investors may be uncomfortable handing over extensive decision-making authority—especially in volatile markets.

4. Performance-Linked Fees:
   In certain cases, managers might charge a performance-based fee on top of the base fee. This can align interests but can also lead to higher costs when performance surpasses benchmarks.

Regulatory and Compliance Considerations

Managed fee-based accounts and discretionary portfolio management in Canada are regulated by the Canadian Investment Regulatory Organization (CIRO), as well as by provincial securities commissions. Key points include:

1. Registration Requirements:
   • Advisors providing discretionary management must hold the appropriate registration category (e.g., Portfolio Manager) with CIRO or the applicable regulatory body.
   • Non-discretionary managed programs may be offered by registered investment dealers without full portfolio manager registration, provided certain regulations are met and the client retains ultimate decision-making control.

2. Suitability and KYC (Know Your Client):
   • Advisors must conduct thorough suitability assessments, ensuring each recommendation or portfolio holding aligns with the client’s objectives, risk tolerance, and time horizon.
   • Continuous monitoring of a client’s financial situation is critical, updating the KYC form regularly.

3. Investment Policy Statement (IPS):
   • A central document guiding discretionary management.
   • Must outline objectives, constraints, and the methodology for measuring performance.
   • Revisited periodically to ensure alignment with any changes in the client’s profile or market conditions.

4. Performance Reporting and Record-Keeping:
   • Portfolio managers are required to provide clients with regular account statements and performance reports.
   • Detailed trade records must be accurately maintained to show compliance with the IPS, regulatory requirements, and client instructions.

5. Transparent Fee Disclosure:
   • All fees, including wrap fees, advisory fees, transaction costs, and performance-based fees, must be clearly explained to the client.
   • Advisors must provide cost and compensation disclosure, ensuring transparency about how they are remunerated.

Practical Example: Implementing a Managed Fee-Based Solution

Suppose an investor—Elena, age 50—seeks a balanced approach, blending capital growth and income generation. She has $1.2 million in investable assets, split between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). She meets with a portfolio manager at RBC Dominion Securities:

1. They jointly create an IPS outlining that a 60% equity / 40% fixed-income allocation is appropriate.
2. Elena’s risk tolerance is moderate; growth is important, but capital preservation takes priority.
3. The manager establishes a wrap account covering all necessary trading costs and administrative fees.
4. On a quarterly basis, the manager rebalances Elena’s portfolio to maintain the 60/40 split, using a combination of Canadian government bonds and Canadian, U.S., and global equities.
5. Fees are charged on a tiered scale: 1.00% for the first $500,000, 0.80% for the next $500,000, and 0.70% on assets above $1 million.

This approach simplifies her life: she pays one fee, and she trusts her portfolio manager to stay informed about market trends, adjusting her holdings accordingly. Transparent quarterly statements show portfolio performance and the fees paid, enabling a consistent assessment of value over time.

Best Practices, Pitfalls, and Strategies for Success

Best Practices

• Craft a Detailed IPS: Ensure the IPS covers goals, constraints, return targets, risk capacity, and monitoring frequency.
• Communicate Frequently: Encourage open dialogue between client and portfolio manager, especially when major life events occur or market conditions shift.
• Compare Fee Structures: Evaluate multiple providers to understand fee schedules, performance track records, and service levels.
• Monitor Performance Diligently: Use benchmarks or model portfolios to compare performance periodically and assess manager effectiveness.

Common Pitfalls

• Overlooking Hidden Fees: Some wrap programs or managed accounts charge expense ratios for underlying funds, platform fees, or performance fees in addition to the base fee.
• Underestimating Risk Tolerance: Overly aggressive portfolios can lead to client distress in a downturn, while overly conservative portfolios could limit long-term growth.
• Lack of Transparency: Some managers do not provide clear, itemized statements. This oversight can erode trust and make it difficult to measure the program’s total cost.

Strategies for Overcoming Challenges

• Education: Encourage clients to learn the basics of portfolio theory, risk management, and performance metrics.
• Holistic Planning: Integrate the managed account with broader financial considerations such as tax planning, retirement strategies, and estate planning.
• Gradual Adoption: Some clients prefer a partial transition to managed fee-based accounts while retaining a portion in a self-directed account for personal trading.

Visualizing the Managed Account Flow

To illustrate the workflow of a discretionary, managed fee-based account, examine the following Mermaid diagram:

    flowchart LR
	    A(Client Profile/KYC) --> B(Investment Policy Statement)
	    B --> C(Portfolio Manager Discretion)
	    C --> D(Asset Allocation & Security Selection)
	    D --> E(Execution of Trades)
	    E --> F(Periodic Rebalancing & Reporting)
	    F --> A[Review & Update Client Profile]

1. The client’s profile and KYC information fuel the Investment Policy Statement.
2. The IPS defines how the portfolio manager will exercise discretion.
3. The manager sets asset allocation and selects securities in alignment with client objectives.
4. Trades are executed (without the need for individual approvals in a discretionary setup).
5. The portfolio is periodically rebalanced.
6. Continuous reporting and updating ensure that changes in the client’s life or financial situation are reflected in the portfolio.

Summary and Key Takeaways

Managed fee-based accounts streamline investment management by unifying all costs under a single, predictable fee. Clients benefit from professional oversight, thorough KYC, continuous monitoring, and comprehensive reporting. Common structures include wrap accounts, separately managed accounts, unified managed accounts, and model portfolios/robo-advisors—all varying in their degree of customization and advisor involvement.

When considering or offering managed fee-based programs, remain mindful of:

• Clear, consistent communication and transparency around fees.
• Rigorous adherence to regulatory standards and suitability requirements.
• Ongoing performance monitoring relative to benchmarks and stated objectives.
• Flexible, personalized strategies through SMAs or UMAs for clients with specialized needs or constraints.

With a well-structured IPS, prudent manager selection, and proper oversight, managed fee-based accounts can effectively help attain a client’s long-term investment goals under Canadian regulatory frameworks.

References and Additional Resources

• CIRO Rules on discretionary accounts and portfolio management standards:
→ https://www.ciro.ca/

• CIFP (Canadian Institute of Financial Planning) training modules on advanced portfolio management:
→ https://www.cifp.ca/

• CFA Institute Article: “Creating an Investment Policy Statement”
→ (Visit the CFA Institute website and search for related resources.)

• CSI’s “Portfolio Management Techniques” online course – advanced strategies for discretionary accounts, risk control, and performance measurement.

• Open-Source Financial Tools:
– “Portfolio Visualizer” (https://www.portfoliovisualizer.com/) for simulating discretionary strategies and backtesting asset allocations.

Ace Your Knowledge: Managed Fee-Based Accounts in Canada Quiz

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