Mutual-Fund Advisory Program

What Is a Mutual-Fund Advisory Program?

A mutual-fund advisory program, also known as a mutual fund wrap, is a portfolio of mutual funds that are selected to match a pre-set asset allocation. The pre-set asset allocation model is based on the investor's objectives and offered in a single investment account together with the services of a professional investment adviser.

Typically, investors will not be charged separate transaction fees, but periodic (i.e., monthly/quarterly/yearly) asset-management fees based on the average value of assets held within the account.

How a Mutual-Fund Advisory Program Works

Mutual funds are a simple way for investors to gain access to securities that are managed by a professional. However, there are thousands of mutual funds to choose from, and the decision of which to invest in can be difficult and confusing. Mutual fund advisory programs make the process easier by putting the decision in the hands of a professional based on your own criteria.

Unlike managed accounts, where the financial adviser has full discretion over any investment decisions, mutual-fund advisory programs allow the investor to work with the adviser in developing the optimal asset-allocation strategy. The adviser will help determine which model is best based on various factors such as the investor's goals, risk tolerance, time horizon, and income while providing ongoing guidance and investment support.

Benefits of a Mutual-Fund Advisory Program

Investors in mutual-fund advisory programs can benefit from lower trading costs and a professionally advised portfolio based on their personalized investing interests. The annual wrap fee is usually tiered based on assets in the program. It can range from approximately 0.25% to 3%, depending on the program, and is in addition to the annual operating fees charged by the funds in the portfolio.

With the offer of professional advice and support from a practiced financial advisor, combined with the low costs, as well as low minimum investment amounts, mutual advisory programs are a great way for novice investors to access the market.

Mutual-Fund Advisory Programs vs. Robo-Advisors

Mutual-fund advisory programs can be a good investment option for investors. However, the increasing presence of robo-advisors has created competition for these programs. As a result, many full-service brokerage firms have begun to offer robo-advisor alternatives for their customers. Schwab’s Intelligent Portfolios is one example.

Robo-advisor platforms typically provide the same investment profiling and portfolio building services. They offer some additional benefits in that the service is automated, fees can be lower, and investment minimums are usually lower. With the lower minimum investments, robo-advice wrap programs can be offered to investors seeking to build a managed portfolio with only a few thousand dollars.

Currently, most robo-advice wrap programs use exchange-traded funds (ETFs) rather than mutual funds. ETFs are more liquid than mutual funds and typically come at lower costs. That being said, depending on the ETFs chosen, it can be difficult to beat the market returns as most ETFs track an index. Still, the option can be good for new investors.

Real-World Example

UBS offers PACE (Personalized Asset Consulting and Evaluation) Select Funds, a fee-based, non-discretionary mutual-fund advisory program utilizing a disciplined approach to selecting and building a diversified portfolio of mutual funds. Here's how PACE works: