16.1 Fee-Based Accounts: Managed & Non-Managed Models

Canadian Securities Course CSC

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1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

16.1 Fee-Based Accounts: Managed & Non-Managed Models

Key Takeaways Explain This Topic AI

Fee-based accounts charge a percentage of assets instead of commissions, which reduces the incentive to trade.

Managed fee-based accounts include mutual fund wraps, separately managed accounts and discretionary advisor-managed accounts.

In a non-managed fee-based account, the client pays an asset-based fee but approves each trade.

Moving an inactive client to a fee-based account that costs more than commissions would (reverse churning) is a regulatory concern.

Investment counsel fees on non-registered accounts are generally deductible under paragraph 20(1)(bb) of the Income Tax Act.

Last updated: October 2026

Evolution of Wealth Advisory: Commission vs. Fee-Based Models

The Canadian retail wealth management industry has undergone a structural transformation over recent decades. Historically, retail brokerage was almost exclusively transactional: registered representatives acted as brokers executing buy and sell orders in exchange for transaction-based commissions or sales loads. While this traditional model served simple execution needs, it created inherent conflicts of interest and misaligned incentives between clients and advisors.

In response to investor demand, regulatory pressure, and the professionalization of financial planning, the industry has migrated toward fee-based account models , where clients pay an unbundled, ongoing fee calculated as an annual percentage of Assets Under Management (AUM) .

The Traditional Commission-Based Model

In a commission-based account, the dealer and the advisor earn compensation exclusively when transactions occur or when specific investment products are sold:

Transaction Charges & Commissions : Every purchase or sale of equities, bonds, or exchange-traded funds (ETFs) incurs a ticket fee or commission (e.g., $50 to $150 per trade, or a percentage of trade value).

Embedded Product Sales Loads : In the mutual fund sector, traditional Class A units historically included front-end sales charges (paid upfront by the client) or deferred sales charges (DSCs, which locked client capital in for years under sliding redemption penalties—a practice banned across Canada as of June 2022).

Embedded Trailing Commissions (Trailer Fees) : Mutual fund management companies pay ongoing trailer fees (typically 0.25% to 1.00% annually) to the dealer firm to compensate the advisor for ongoing service, deducted directly from the fund's assets as part of the Management Expense Ratio (MER).

Structural Shortcomings of Commission Accounts

Incentive to Generate Volume (Churning) : Because advisors earn revenue only when trades execute, an unscrupulous advisor faces a financial incentive to recommend frequent buying and selling—a prohibited practice known as churning .

Product Bias : Commission rates and trailer fees vary across product manufacturers. Advisors might consciously or unconsciously favor proprietary or high-paying mutual funds over lower-cost alternatives such as index ETFs.

Suitability-Only Benchmark : Under traditional Canadian securities rules, recommendations were evaluated primarily against a "suitability" standard (whether the product fits the client's basic risk tolerance and time horizon) rather than whether it represents the most cost-effective and best option available.

The Modern Fee-Based Model

Under a fee-based relationship, the client pays a transparent, explicit annual fee calculated as a percentage of total billable assets in the account (e.g., 1.00% to 1.50% on the first $500,000, scaling down for larger portfolios). This fee covers ongoing investment advice, portfolio construction, financial planning, custody, and trade execution.

Core Advantages of Fee-Based Accounts

Direct Alignment of Interests : The advisor's revenue is directly tied to portfolio performance. When the client's account value increases, the advisor's fee revenue grows; if the market declines and the portfolio drops, the advisor's compensation decreases proportionally. The advisor has zero financial incentive to recommend unnecessary trading.

Objective Product Selection : Fee-based accounts utilize Class F mutual fund units or low-cost ETFs. Class F units strip out the embedded trailing commission entirely, reducing the fund's internal MER by 0.75% to 1.00%. The advisor is compensated via the explicit account fee, eliminating product manufacturer bias.

Tax Deductibility in Non-Registered Accounts : Under paragraph 20(1)(bb) of the federal Income Tax Act , investment counseling and management fees paid directly by a taxpayer for taxable non-registered accounts are tax-deductible against ordinary income . In contrast, commissions paid on stock purchases are added to the Adjusted Cost Base (ACB). Embedded mutual fund MERs are not claimed on the investor's return; they are paid inside the fund and reduce the fund's distributable income, which gives an indirect tax benefit only to the extent the fund has taxable income to offset.

Comparison: Commission-Based vs. Fee-Based Accounts

Dimension Commission-Based Account Fee-Based Account

Primary Compensation Commissions per trade, sales loads, embedded trailer fees Unbundled annual percentage fee based on AUM (e.g., 0.50%–1.50%)

Trading Activity Incentive High trade frequency generates higher advisor revenue Trade frequency does not affect fee; focus is on strategic allocation

Product Types Utilized Class A mutual funds, corporate debt with dealer markups, individual equities Class F mutual funds, fee-based ETFs, individual equities and bonds

Advisor-Client Alignment Transaction-focused; potential conflict over trade frequency and product selection Partnership-focused; revenue rises and falls with client portfolio value

Account Minimums Typically low or none (accessible to small retail investors) Moderate to high ($100,000 to $1,000,000+ depending on model)

Tax Treatment (CRA ITA 20(1)(bb)) Commissions capitalized into ACB; embedded MERs not claimed on the T1 (paid inside the fund) Explicit advisory fees on non-registered accounts are fully tax-deductible

Fee Transparency Embedded in product MERs and trade confirmations; less apparent to client Itemized explicitly on quarterly statements and annual CRM2 reports

Fee-Based Account Architectures

Within the broad category of fee-based wealth management, several distinct account structures exist in the Canadian marketplace, each tailored to different client asset levels, customization needs, and governance preferences. ┌─────────────────────────────────────────┐

• │ Retail Fee-Based Account Models │
• └────────────────────┬────────────────────┘
• │
• ┌──────────────────────────────┬──────────────┴────────────────┬──────────────────────────────┐
• ▼ ▼ ▼ ▼
• ┌───────────────┐ ┌───────────────┐ ┌───────────────┐ ┌───────────────┐
• │ Mutual Fund │ │ Separately │ │ Advisor- │ │ Robo-Advisor │
• │ Wraps │ │ Managed (SMA) │ │ Managed │ │ / Digital │
• └───────┬───────┘ └───────┬───────┘ └───────┬───────┘ └───────┬───────┘
• │ │ │ │
• Turnkey Asset Direct Security Discretionary Algorithmic
• Allocation; Ownership; Tax Authority Held ETF Models;
• Class F Units; Harvesting; External by Licensed PM; Low Cost;

\$25k–\$50k Min. Sub-Advisors; \$100k+ High Customization \$0–\$5k Min.

1. Wrap Accounts: General Mechanics

A wrap account is a comprehensive wealth management vehicle in which all investment management, trade execution, clearing, custody, and administrative reporting services are "wrapped" into a single, consolidated annual fee. Rather than paying separate fees for each transaction or service, the client pays a flat percentage fee billed monthly or quarterly based on the average daily or quarter-end market value of the assets.

2. Mutual Fund Wraps

A mutual fund wrap is a structured portfolio composed of multiple underlying mutual funds designed to achieve a specific asset allocation model (e.g., Conservative Income, Balanced Growth, Maximum Capital Appreciation).

Structure and Units : The overlay manager selects specific mutual funds—often across multiple distinct fund families—to represent Canadian equities, global equities, fixed income, and cash. To avoid double-charging, the underlying funds consist of Class F units , which carry zero trailing commissions, ensuring the client only pays the underlying fund's basic operating expenses plus the unbundled wrap fee.

The Role of the Overlay Manager : Mutual fund wraps employ an institutional overlay manager who continuously monitors the overall portfolio balance. When market fluctuations push asset weights out of tolerance bands (e.g., equity allocation rises 5% above target due to a bull run), the overlay manager automatically rebalances the portfolio back to strategic targets.

Accessibility : Mutual fund wraps represent the most accessible fee-based structure, often featuring low minimum investment thresholds ($25,000 to $50,000), making them popular for emerging affluent clients.

3. Separately Managed Accounts (SMAs)

A Separately Managed Account (SMA) is an elite fee-based model designed for high-net-worth (HNW) investors. Unlike a mutual fund wrap where investors own units of a collective pooled fund, an SMA investor maintains direct, beneficial ownership of every individual security held within the portfolio.

How SMAs Operate

External Specialized Portfolio Managers (Sub-Advisors) : In an SMA, the primary wealth advisor pairs the client with specialized, institutional asset managers (sub-advisors) who oversee distinct sleeves of the portfolio. For instance, a $1,500,000 portfolio might allocate $500,000 to an institutional Canadian dividend growth manager, $500,000 to a global infrastructure manager, and $500,000 to an active fixed-income manager.

The Overlay Manager : The dealer's overlay manager oversees the aggregate account, ensuring that aggregate cash flow, currency hedging, and asset allocation adhere to the client's overarching Investment Policy Statement (IPS).

Distinct Advantages of SMAs

Direct Security Ownership & Individual Tax Cost Base : In a traditional mutual fund, when other unitholders redeem during a market downturn, the fund manager may be forced to sell appreciated securities, triggering capital gains that are distributed to all remaining unitholders—even those who recently joined. In an SMA, the client owns the actual shares of Royal Bank, Canadian National Railway, or Microsoft. The client's Adjusted Cost Base (ACB) is entirely unique to their personal purchase date, eliminating inherited capital gains.

Active Tax-Loss Harvesting : The overlay manager can selectively harvest capital losses on individual securities to offset realized capital gains elsewhere in the client's taxable estate, optimizing after-tax net wealth.

Customized Portfolio Constraints : SMAs allow bespoke screening. If a client is a senior corporate executive holding $1,000,000 in company stock options, the SMA manager can be instructed to exclude that company or its direct competitors from the equity sleeve to prevent catastrophic single-stock concentration risk. Similarly, clients with ethical, religious, or ESG preferences can enforce personalized negative screens (e.g., excluding defense contractors, fossil fuels, or gaming).

Account Minimums : Because managing individual stock portfolios incurs operational overhead, SMAs demand substantial capital—typically $100,000 to $250,000 per sub-advisor sleeve, with total account minimums generally ranging from $500,000 to $1,000,000+.

4. Advisor-Managed Discretionary Accounts

In an advisor-managed discretionary account , the client delegates full day-to-day investment decision-making authority to their personal wealth advisor. The advisor executes buy, sell, and rebalancing transactions across client accounts without contacting the client for prior approval before each individual trade.

Regulatory & Licensing Requirements

Because discretionary management places immense trust in the advisor, the Canadian Investment Regulatory Organization (CIRO) and provincial securities commissions enforce strict proficiency criteria:

Registration Category : The advisor must be registered as a Portfolio Manager (PM) or Associate Portfolio Manager (APM) .

Designation Requirements : The professional must hold recognized advanced credentials, such as the Chartered Investment Manager (CIM) designation or the Chartered Financial Analyst (CFA) charter, backed by several years of documented portfolio management and equity analysis experience.

Supervisory Framework : The dealer firm's compliance department conducts mandatory post-trade surveillance. The portfolio manager must construct a detailed, binding Investment Policy Statement (IPS) for each client, defining permissible asset classes, maximum single-issuer concentration caps (e.g., no single stock exceeding 10% of portfolio value), and asset allocation corridors.

5. Robo-Advisors & Digital Wealth Platforms

Over the past decade, technological innovation has produced robo-advisors (online digital wealth management platforms such as Wealthsimple, Questwealth, or bank-sponsored digital divisions like BMO SmartFolio).

Digital Client Onboarding : The client completes an online questionnaire covering age, income, investment time horizon, financial goals, and risk tolerance (an automated Know-Your-Client / KYC process).

Algorithmic Portfolio Construction : Sophisticated algorithms map the client's risk score to an optimized portfolio composed primarily of ultra-low-cost index ETFs.

Automated Rebalancing & Harvesting : Algorithms continuously track asset drift and automatically execute rebalancing trades or tax-loss harvesting without human intervention.

Fee Structure : Digital platforms charge an ultra-lean advisory fee (typically 0.20% to 0.50% of AUM) on top of the underlying ETF MERs (0.10% to 0.25%), resulting in an all-in cost of 0.30% to 0.75%—substantially lower than traditional full-service wealth advisory.

Hybrid Models : Many platforms now offer hybrid tiers, pairing automated algorithmic execution with access to on-demand human Certified Financial Planners (CFPs) for retirement, tax, and estate planning.

Summary Comparison of Retail Account Models

Model Target Investor Underlying Assets Discretionary Authority Minimum Investment Primary Advantage

Traditional Commission Transactional, buy-and-hold investors Stocks, bonds, Class A mutual funds None (client approves every trade) $0 to $5,000 Low cost for clients who execute very few trades

Mutual Fund Wrap Mass affluent seeking turnkey diversification Class F mutual funds across multiple asset classes Centralized (handled by overlay manager) $25,000 to $50,000 Institutional asset allocation and automatic rebalancing with low minimums

Separately Managed (SMA) High-net-worth investors (HNW) Individual equities and bonds managed by sub-advisors Delegated to external sub-advisors and overlay manager $100,000+ per sleeve ($500,000+ total) Direct ownership, complete tax customization, tax-loss harvesting, bespoke exclusions

Advisor-Managed Affluent clients seeking personalized relationship Individual stocks, bonds, ETFs, specialized funds Delegated directly to registered Portfolio Manager $250,000 to $1,000,000 Bespoke, personalized portfolio management tailored to a customized IPS

Robo-Advisor / Digital Tech-savvy, cost-conscious, accumulating investors Low-cost passive index ETFs Algorithmic / automated execution $0 to $5,000 Ultra-low all-in cost (0.30%–0.75%), fully automated rebalancing

Worked Example: After-Tax Impact of Fee-Based Advisory (CRA ITA 20(1)(bb))

Consider Caroline, a high-earning corporate executive residing in Ontario with a top marginal personal tax rate of 53.53% on ordinary income. She maintains a $1,000,000 taxable non-registered investment account .

She is evaluating two account structures with equivalent gross investment performance:

Option A (Traditional Commission / Embedded Model) : Invests in Class A mutual funds with an average Management Expense Ratio (MER) of 2.20% . The MER is deducted internally within the fund before unit prices are published.

Option B (Fee-Based SMA Model) : Invests in a Separately Managed Account. The underlying institutional securities and sub-advisors incur operating/trading costs of 0.20% , and Caroline pays an explicit annual fee-based wealth advisory fee of 1.25% billed directly from the account.

• Financial & Tax Analysis OPTION A: Embedded Class A Funds
• Gross Embedded Fee: \$1,000,000 x 2.20% = \$22,000
• Tax Deductibility: none on the T1. Embedded MERs are paid inside the fund;
• they reduce the fund's distributable income (an indirect benefit

only to the extent the fund has taxable income to offset).

• Net Out-of-Pocket Cost: \$22,000

• OPTION B: Fee-Based SMA Account
• Underlying Institutional Trading/Sleeve Costs: \$1,000,000 x 0.20% = \$2,000
• Explicit Advisory Fee: \$1,000,000 x 1.25% = \$12,500
• Total Gross Fees: \$14,500

• Tax Deductibility under ITA 20(1)(bb):

The \$12,500 advisory fee is directly tax-deductible against ordinary income:

• Tax Savings = \$12,500 x 53.53% = \$6,691.25
• Net After-Tax Advisory Fee = \$12,500 - \$6,691.25 = \$5,808.75
• Total Net After-Tax Cost = \$5,808.75 + \$2,000 = \$7,808.75
• Conclusion

By transitioning to a fee-based SMA, Caroline lowers her gross annual fee from $22,000 to $14,500. Furthermore, because the explicit advisory fee is fully deductible under CRA paragraph 20(1)(bb), Caroline's net after-tax cost on this simplified basis is $7,808.75 (an effective net fee of about 0.78% ). The comparison overstates the gap somewhat, because the $22,000 MER is also paid with pre-tax fund income to the extent the funds earn taxable income. The direction of the result holds: an explicit, deductible fee on a non-registered account usually costs less after tax than the same fee buried in a product.

Non-Managed Fee-Based Accounts

Not every fee-based account gives the advisor discretion. In a non-managed (non-discretionary) fee-based account , the client pays an asset-based fee that covers advice and trading, but the advisor must still get the client's approval for each trade. These accounts suit clients who want ongoing advice and to make the final decisions, and who would otherwise pay frequent commissions.

Regulators watch for reverse churning : moving a client who rarely trades from a commission account into a fee-based account where the client pays more each year for little service. Before recommending any fee-based account, the advisor should compare its expected cost with a commission account given the client's trading and service needs.