Question 45

Portfolio rebalancing is commonly associated with fee-based accounts.

Fee-based accounts are typically structured to allow for ongoing management and adjustments, including portfolio rebalancing, which is essential for maintaining an investment strategy aligned with an investor's goals.

A) Nondiscretionary

Nondiscretionary accounts require client approval for each transaction, which is contrary to the typical management style of fee-based accounts. Fee-based accounts often involve discretionary management, where the advisor makes investment decisions on behalf of the client without needing prior approval for individual transactions.

B) Portfolio rebalancing

Portfolio rebalancing is a crucial feature of fee-based accounts, as these accounts generally involve active management. Advisors working on a fee basis regularly assess and adjust the asset allocation to maintain the desired risk level and investment strategy, reflecting the dynamic nature of financial markets.

C) Buy and hold strategy

While a buy and hold strategy can be part of some investment approaches, it is less common in fee-based accounts that seek to provide ongoing management. Fee-based accounts are usually more active in nature, focusing on adjustments and rebalancing rather than a static buy and hold approach.

D) Customer self-directed

Self-directed accounts allow customers to make their own investment decisions without advisor input, which contradicts the purpose of fee-based accounts. These accounts typically involve professional management, where the advisor takes an active role in managing the client's investments.

Conclusion

Portfolio rebalancing is integral to fee-based accounts, distinguishing them from other account types that may emphasize passive strategies or customer-directed management. The other options do not align with the active management characteristic of fee-based accounts, thus reinforcing that B is the correct answer.