25.3.2 Advisor-managed Accounts
What are Advisor-managed Accounts?
Advisor-managed accounts give discretion to an advisor to make investment decisions on the client’s behalf. The advisor who manages this type of account must be licensed as a portfolio manager. The investments are held within the client’s account in amounts that follow the advisor’s portfolio model.
Key Features of Advisor-managed Accounts
Advisor-managed portfolios focus on the advisor’s area of expertise and leverage skills in either fundamental or technical analysis. The advisor determines the client’s risk tolerance and establishes a portfolio aligning with a suitable model, guided by the firm’s security selections and portfolio construction.
Advantages of Advisor-managed Accounts
- Cost Efficiency: The cost may be lower because no intermediaries are involved.
- Tailored Investment Management: The advisor understands the client’s needs and applies a customized investment approach.
- Security Exclusions: Some programs permit the exclusion of certain securities.
- Tax Loss Selling: Programs may allow for tax loss selling to benefit specific clients.
What is Tax Loss Selling?
Tax loss selling involves realizing a capital loss to offset gains, deviating temporarily from the model portfolio.
Types of Advisor-managed Programs
Advisor-managers predominantly use two types of programs:
Model-based Account
Model-based programs use established portfolios tailored to individual client needs. They apply standardized models while allowing for some customization based on the client’s unique requirements.
Non-model-based Account
These are temporary solutions when clients do not actively manage their accounts due to illness or absence. Advisors monitor existing accounts instead of creating new models.
Did You Know?
Tax loss selling is a strategic financial move to decrease taxable income. It’s a common practice during market downturns and allows clients to benefit from capital losses against gains.
Glossary and Definitions
- Fundamental Analysis: Evaluation of a company’s business at the core, including its financial statements, management, business model, and competitors.
- Technical Analysis: Examination of price movements, volume, and historical trading patterns to forecast future stock price movements.
- Risk Tolerance: The degree of variability in investment returns that an individual is willing to withstand.
- Tax Loss Selling: Selling securities at a loss to offset gains elsewhere, reducing taxable income.
Frequently Asked Questions (FAQs)
Q: Do advisor-managed accounts always use model portfolios?
A: Not always. While model-based accounts are common, non-model-based accounts are used when clients cannot actively manage their accounts, such as during travel or illness.
Q: What types of analyses do advisors use?
A: Advisors specialize in either fundamental or technical analysis to manage portfolios.
Q: Can clients exclude specific securities from their portfolios?
A: Yes, some advisor-managed programs allow clients to exclude certain securities based on personal preferences or ethical considerations.
Q: What is the primary benefit of tax loss selling?
A: Tax loss selling helps to realize a capital loss to offset gains and reduce taxable income for the client.
Key Takeaways
- Advisor-managed accounts delegate investment decisions to licensed portfolio managers.
- These accounts allow for cost efficiency, tailored investment strategies, and potential tax benefits.
- Advisors use fundamental or technical analysis to guide their decisions, and offer both model-based and non-model-based programs.
Continue to leverage your readings with this guide to master the concepts and strategies related to advisor-managed accounts in the Canadian Securities Course.
📚✨ Quiz Time! ✨📚
## What is a key characteristic of advisor-managed accounts?
- [ ] Clients make their own investment decisions.
- [x] Advisors manage investments on behalf of clients.
- [ ] Advisors need not be licensed.
- [ ] Advisors are responsible only for holding securities.
> **Explanation:** Advisor-managed accounts give discretion to another person (the advisor) to make investment decisions on the client’s behalf. The advisor managing the account must be licensed as a portfolio manager.
## What is a primary benefit of advisor-managed accounts?
- [ ] Higher costs due to multiple parties.
- [ ] Generic investment management.
- [x] Tailored investment management approach.
- [ ] No customization in investment choices.
> **Explanation:** Advisor-managed accounts enable the advisor to understand and cater to the specific client’s needs, applying a customized investment management approach.
## What must an advisor do before establishing a portfolio for a client?
- [ ] Assign random investments.
- [ ] Use a standard portfolio model for all clients.
- [x] Determine the client’s risk tolerance.
- [ ] Consult with multiple portfolio managers.
> **Explanation:** The advisor determines the client’s risk tolerance and establishes a portfolio that aligns with a suitable model.
## Which type of analysis might an advisor use when managing an advisor-managed account?
- [ ] Sentiment analysis.
- [ ] Statistical analysis.
- [x] Fundamental or technical analysis.
- [ ] Psychological analysis.
> **Explanation:** The portfolios offered by advisors tend to focus on the advisor’s area of expertise, utilizing their skills in either fundamental or technical analysis.
## What is a model-based account in advisor-managed services?
- [x] An account using model portfolios tailored to individual needs.
- [ ] An account managed without any models.
- [ ] An account managed by the clients themselves.
- [ ] An account only for tax loss selling.
> **Explanation:** Model-based accounts refer to ongoing programs where investment advisors use model portfolios tailored to the needs of specific clients.
## When are non-model-based account management programs typically used?
- [ ] For clients who need tax advice.
- [x] Temporarily when clients are unable to tend to their accounts.
- [ ] As a permanent investment strategy.
- [ ] For clients interested in high-frequency trading.
> **Explanation:** Non-model-based accounts are temporary and used when clients are unable to manage their own accounts, such as due to illness or being abroad.
## Which of the following is allowed in some advisor-managed programs?
- [ ] Ignoring client-specific needs.
- [ ] Prohibiting tax loss selling.
- [x] Excluding certain securities at the client's request.
- [ ] Disregarding the advisor’s analysis.
> **Explanation:** Some advisor-managed programs permit client accounts to exclude certain securities at the client's request.
## What is the purpose of tax loss selling in advisor-managed accounts?
- [ ] Generating short-term gains.
- [x] Realizing a capital loss to offset gains for the client.
- [ ] Increasing the overall portfolio value.
- [ ] Ignoring market conditions.
> **Explanation:** Tax loss selling involves a temporary deviation from the model portfolio to realize a capital loss which offsets some of the gain to benefit the client.
## What are the portfolios in advisor-managed accounts often guided by?
- [ ] Client's uninformed choices.
- [ ] The current market sentiment.
- [x] Firm’s security selections and portfolio construction.
- [ ] Random market predictions.
> **Explanation:** The model portfolios in advisor-managed accounts are often guided by the firm’s security selections and portfolio construction.
## What is a typical feature of cost in advisor-managed accounts?
- [ ] Costs are higher due to multiple parties involved.
- [ ] No significant cost difference compared to client-managed accounts.
- [ ] Costs are constant regardless of management style.
- [x] Costs may be lower because no other parties are involved.
> **Explanation:** A key advantage of advisor-managed programs is that costs may be lower because no other parties are involved with the account.