| The mutual fund industry is enormous. | | | | commissions for trading and a single fee |
| | | | based on assets under management. |
| The Investment Company Institute (ICI), a | | | | |
| trade organization representing mutual fund | | | | Mutual fund advisory programs offer |
| providers, cites more than 8,300 U.S.-based | | | | significantly lower minimum investment |
| mutual funds, with combined assets of about | | | | requirements than other managed-money |
| $8 trillion as of end-March 2005. And | | | | products. Some mutual fund advisory programs |
| worldwide, there are about 54,986 mutual | | | | are available at investment minimums as low |
| funds, with assets totaling about $16 | | | | as $25,000, compared to $100,000 or more for |
| trillion, according to the ICI. With so many | | | | other managed-money offerings. Both |
| funds to choose from, selecting one can be a | | | | discretionary and non-discretionary mutual |
| real challenge. Building and monitoring a | | | | fund advisory programs provide consolidated |
| diversified portfolio can be an overwhelming | | | | performance reporting, making it easy for |
| burden. To ease this burden, the industry has | | | | investors to review results at the portfolio |
| created the mutual fund advisory program, | | | | level. |
| also known as the mutual fund wrap. | | | | |
| | | | While mutual fund advisory programs offer |
| How It Works The mutual fund advisory program | | | | many of the same benefits provided by their |
| comes in two versions: discretionary and | | | | more expensive managed-money cousins, there |
| non-discretionary. | | | | is also an important difference. Assets in a |
| | | | mutual fund advisory program are not separate |
| Discretionary A discretionary mutual fund | | | | and distinct from the accounts of other |
| advisory program provides a variety of | | | | investors. Mutual funds, as the name implies, |
| portfolios that incorporate multiple mutual | | | | are mutual investments. The basic premise of |
| funds into pre-selected asset allocation | | | | a mutual fund involves a group of investors |
| models. One model may offer an asset | | | | who pool their assets so that they can afford |
| allocation of 80% equity and 20% fixed income | | | | the services of a professional money manager. |
| while another may offer 80% fixed income and | | | | The money manager then makes portfolio |
| 20% equity. Many of the portfolios divide the | | | | management decisions on behalf of the |
| equity and fixed-income portions among | | | | collected pool of investors. |
| multiple mutual funds, each fund representing | | | | |
| a specific discipline. | | | | In most managed-money products, such as |
| | | | traditional separate-account portfolios, |
| Investors work with a professional financial | | | | investors do not pool their assets. Each |
| advisor to map out their personal financial | | | | investor has individual cost basis on the |
| goals. Based on those goals, the advisor | | | | securities in the portfolio, which enables |
| reviews the offerings in the mutual fund | | | | the investors to customize a portfolio by |
| advisory program and selects the asset | | | | restricting investment in specific securities |
| allocation model that matches the investor's | | | | or industry sectors. It also enables |
| goals. For example, a conservative investor | | | | investors to engage in the selective buying |
| interested in income generation would be | | | | or selling of specific securities in order to |
| guided to select a portfolio that allocates | | | | minimize capital-gains taxes. This technique, |
| the majority of its assets to fixed-income | | | | known as tax gain /loss harvesting, can be a |
| investments. An aggressive investor primarily | | | | powerful benefit for tax-sensitive, affluent |
| interested in capital appreciation would be | | | | investors. To learn more about the benefits |
| guided to select a portfolio that allocates | | | | of individual cost basis, see Separately |
| the majority of its assets to equity | | | | Managed Accounts: A Boon for All. |
| investments. | | | | |
| | | | Should You Invest in One? A mutual fund |
| The structure of a discretionary mutual fund | | | | advisory program offers more benefits than |
| advisory program is similar to the structure | | | | those generally associated with a mutual fund |
| of a multi-discipline account. Like a | | | | purchase. |
| multi-discipline account, a mutual fund | | | | |
| advisory program offers a diversified | | | | In addition to a professionally managed, |
| portfolio, professional advice and guidance, | | | | diversified portfolio that includes multiple |
| ongoing due diligence of the investments in | | | | mutual funds, a mutual fund advisory program |
| the portfolio and automatic rebalancing of | | | | provides three levels of oversight. The |
| the portfolio to maintain the desired asset | | | | mutual fund managers each oversee their |
| allocation. The discretionary mutual fund | | | | portfolios, the program sponsor oversees the |
| advisory program delegates authority to the | | | | mutual fund managers and the investment |
| program sponsor (often the financial | | | | advisor provides assistance with the initial |
| advisor's employer or a subsidiary of the | | | | investment selection and ongoing monitoring |
| advisor's employer) to make changes to the | | | | of the portfolio's performance in relation to |
| asset allocation model and to add or remove | | | | the investor's objectives. The fee-based |
| mutual funds from the portfolio without | | | | compensation reduces concerns about the |
| approval from the investor. | | | | objectivity of the advisor's recommendations. |
| | | | |
| Non-discretionary In the non-discretionary | | | | Mutual fund advisory programs are designed to |
| program, the investor and the financial | | | | meet the needs of investors seeking |
| advisor review a list of mutual funds that | | | | professional advice and guidance in the |
| have been pre-screened and selected for | | | | construction of a diversified portfolio. |
| inclusion in the program, and choose funds | | | | These programs provide a convenient tool for |
| from that list to create a customized asset | | | | investors who don't have the time or interest |
| allocation model. The investor is responsible | | | | to construct and monitor a portfolio on their |
| for providing approval of the rebalancing of | | | | own. |
| the portfolio and for the decision to replace | | | | |
| any of the mutual funds. | | | | Investors who have significant concerns about |
| | | | capital-gains taxes may be better served by |
| Both the discretionary and non-discretionary | | | | other, more sophisticated managed-money |
| programs are considered to be entry-level | | | | products, such as some of those introduced in |
| managed-money products because they offer | | | | Wrap It Up: The Vocabulary and Benefits of |
| professional advice and guidance, no | | | | Managed Money. |