Mutual fund wraps

The mutual fund industry is enormous.Mutual fund advisory programs offer significantly
The Investment Company Institute (ICI), a tradelower minimum investment requirements than
organization representing mutual fund providers,other managed-money products. Some mutual
cites more than 8,300 U.S.-based mutual funds,fund advisory programs are available at
with combined assets of about $8 trillion as ofinvestment minimums as low as $25,000,
end-March 2005. And worldwide, there are aboutcompared to $100,000 or more for other
54,986 mutual funds, with assets totaling aboutmanaged-money offerings. Both discretionary and
$16 trillion, according to the ICI. With so manynon-discretionary mutual fund advisory programs
funds to choose from, selecting one can be a realprovide consolidated performance reporting,
challenge. Building and monitoring a diversifiedmaking it easy for investors to review results at
portfolio can be an overwhelming burden. To easethe portfolio level.
this burden, the industry has created the mutualWhile mutual fund advisory programs offer many
fund advisory program, also known as the mutualof the same benefits provided by their more
fund wrap.expensive managed-money cousins, there is also
How It Works The mutual fund advisory programan important difference. Assets in a mutual fund
comes in two versions: discretionary andadvisory program are not separate and distinct
non-discretionary.from the accounts of other investors. Mutual
Discretionary A discretionary mutual fund advisoryfunds, as the name implies, are mutual
program provides a variety of portfolios thatinvestments. The basic premise of a mutual fund
incorporate multiple mutual funds into pre-selectedinvolves a group of investors who pool their
asset allocation models. One model may offer anassets so that they can afford the services of a
asset allocation of 80% equity and 20% fixedprofessional money manager. The money
income while another may offer 80% fixedmanager then makes portfolio management
income and 20% equity. Many of the portfoliosdecisions on behalf of the collected pool of
divide the equity and fixed-income portions amonginvestors.
multiple mutual funds, each fund representing aIn most managed-money products, such as
specific discipline.traditional separate-account portfolios, investors
Investors work with a professional financialdo not pool their assets. Each investor has
advisor to map out their personal financial goals.individual cost basis on the securities in the
Based on those goals, the advisor reviews theportfolio, which enables the investors to
offerings in the mutual fund advisory program andcustomize a portfolio by restricting investment in
selects the asset allocation model that matchesspecific securities or industry sectors. It also
the investor's goals. For example, a conservativeenables investors to engage in the selective
investor interested in income generation would bebuying or selling of specific securities in order to
guided to select a portfolio that allocates theminimize capital-gains taxes. This technique, known
majority of its assets to fixed-incomeas tax gain /loss harvesting, can be a powerful
investments. An aggressive investor primarilybenefit for tax-sensitive, affluent investors. To
interested in capital appreciation would be guidedlearn more about the benefits of individual cost
to select a portfolio that allocates the majority ofbasis, see Separately Managed Accounts: A Boon
its assets to equity investments.for All.
The structure of a discretionary mutual fundShould You Invest in One? A mutual fund
advisory program is similar to the structure of aadvisory program offers more benefits than
multi-discipline account. Like a multi-disciplinethose generally associated with a mutual fund
account, a mutual fund advisory program offers apurchase.
diversified portfolio, professional advice andIn addition to a professionally managed, diversified
guidance, ongoing due diligence of the investmentsportfolio that includes multiple mutual funds, a
in the portfolio and automatic rebalancing of themutual fund advisory program provides three
portfolio to maintain the desired asset allocation.levels of oversight. The mutual fund managers
The discretionary mutual fund advisory programeach oversee their portfolios, the program
delegates authority to the program sponsorsponsor oversees the mutual fund managers and
(often the financial advisor's employer or athe investment advisor provides assistance with
subsidiary of the advisor's employer) to makethe initial investment selection and ongoing
changes to the asset allocation model and to addmonitoring of the portfolio's performance in
or remove mutual funds from the portfoliorelation to the investor's objectives. The
without approval from the investor.fee-based compensation reduces concerns about
Non-discretionary In the non-discretionarythe objectivity of the advisor's recommendations.
program, the investor and the financial advisorMutual fund advisory programs are designed to
review a list of mutual funds that have beenmeet the needs of investors seeking professional
pre-screened and selected for inclusion in theadvice and guidance in the construction of a
program, and choose funds from that list todiversified portfolio. These programs provide a
create a customized asset allocation model. Theconvenient tool for investors who don't have the
investor is responsible for providing approval oftime or interest to construct and monitor a
the rebalancing of the portfolio and for theportfolio on their own.
decision to replace any of the mutual funds.Investors who have significant concerns about
Both the discretionary and non-discretionarycapital-gains taxes may be better served by
programs are considered to be entry-levelother, more sophisticated managed-money
managed-money products because they offerproducts, such as some of those introduced in
professional advice and guidance, no commissionsWrap It Up: The Vocabulary and Benefits of
for trading and a single fee based on assets underManaged Money.
management.