What Is a Subaccount Charge?

Subaccount charges are a type of fee charged by a bank or other financial institution for the management of a subaccount. Subaccounts are essentially accounts within larger accounts. Subaccounts may keep funds separate for ease of accounting or to allow for a variety of investment strategies within a larger portfolio.

Subaccount fees generally cover payment to an investment advisor who makes investment decisions regarding the subaccount. The charge also covers the cost of buying and selling securities and administering these trades. It is akin to the fee paid for a mutual fund’s investment manager.

Key Takeaways

  • Subaccount charges are fees a bank charges to manage a subaccount.
  • These fees usually pay an investment advisor decisions.
  • The charges also cover expenses such as buying and selling securities.

How a Subaccount Charge Works

Subaccount charges vary by firm and the value of the account but range from about 0.25% to as much as 3.25% annually in some rare instances. Firms include the amount that they charge for managing subaccount investments in the fund’s expense ratio. They also include this information in the fund’s prospectus as well as in subaccount statements.

Subaccounts can help a large company keep track of its gains and losses. For example, a company may keep multiple subaccounts under one large account with a financial institution. Each of these subaccounts typically cover one of the company’s departments. This helps compartmentalize gains and losses so that leadership can easily track the profitability and efficiency of each department.

Similarly, an individual who keeps an investment portfolio in one account with a financial firm sometimes has multiple subaccounts within that portfolio. For example, say one subacccount is for real estate investments and the other is for estate planning.

Subaccount Fees for Variable Insurance Products

Subaccount charges are a common feature of variable insurance products, and allow the policyholder to invest in a variety of portfolios in order to increase the value of the policyholder’s future annuity payout. However, the fees charged often have a substantial impact on the long-term prospects of a portfolio, with high fees negatively impacting overall performance. This negative effect is similar to how high management fees can reduce the overall growth of a mutual fund.

Sometimes, the insurance company substitutes the funds used in each subaccount with money from a different fund. When this happens, the insurance company notifies the policyholder if the new funds carry different subaccount charges than the previous funds.

Contracts typically allow the policyholder to transfer funds from a subaccount that has had funds replaced to a different subaccount for a specified time period. If the policyholder does not choose to transfer funds to a different account during that time period, the funds will automatically be reallocated to the replacement funds.