A wrap account is a type of investment account where a single fee covers all the costs charged to the account. Management, brokerage, and administrative fees are included in a single fee—typically paid quarterly or annually—that might be easier to understand.
- A wrap account is a type of investment account managed by a professional portfolio manager.
- All the fees charged to the account are wrapped into a single “wrap fee.”
- The fee is typically charged quarterly or annually as a percentage of invested assets.
- Typical minimum investments are about $25,000, and the fee may decrease as your balance increases.
Wrap accounts come in two main forms: mutual fund and traditional wrap accounts. Mutual fund wrap accounts include a group of funds that allow the investor to reach their target asset allocation and achieve their investment goals. Traditional wrap accounts accomplish the same task but use a wide variety of securities instead of just mutual funds.
Wrap Accounts vs. Traditional Accounts
Wrap Accounts vs. Regular Accounts
Flat fee for all included services
Fee is usually a percentage of invested assets
Higher minimum balance requirements
Regular accounts may charge a variety of fees, including commissions for each individual trade and annual account maintenance fees. Wrap accounts, meanwhile, put all costs into a single fee, usually calculated as a percentage of the amount invested.
Another difference is that regular brokerage accounts often have no or very low minimum balance requirements. Many brokerages will let you start investing with just a few dollars. Wrap accounts, by contrast, could have minimums in the tens of thousands of dollars. Many wrap accounts require a minimum investment of around $25,000.
Rick Konrad, CFP®, CFA
The Roosevelt Investment Group, Inc., New York, NY
A wrap account is a brokerage account for which the client pays a management fee rather than commissions for individual transactions. The original premise behind these accounts is to change the incentive for brokers, from volume to asset growth, in response to excessive “churning.” However, investors must be cautious about a fee-based model as well.
For example, some wrap accounts are invested primarily in mutual funds, but charge a management fee on top of the underlying expense ratios of the funds, even though there is clearly not much active management value-add. Some mutual fund wrap accounts operated by large mutual fund sponsors have also exhibited signs of excessive portfolio reallocation, in some cases every two weeks, which seems unnecessary for a broad market portfolio.
Wrap Account Advantages and Disadvantages
A wrap account should protect investors from overtrading or churning. This is when a broker or money manager trades an account excessively to generate more commissions. Because the wrap account charges a flat annual fee, the most you can be charged is the fixed percentage, usually 1% to 3%, of your account’s assets.
Since the fee is based on a percentage of your assets under management (AUM), this should align your interests with the account manager’s. If your portfolio performs well and gains value, the manager’s compensation will increase, which can limit conflicts of interest that arise with commission-based compensation.
Wrap fee programs can provide clients with a clearer understanding of the costs associated with advice and securities trading. However, the Securities and Exchange Commission (SEC) has warned that these programs can lead to certain risks that are the flip side of churning: advisors might trade less frequently than what might be beneficial for clients, engage in transactions that reduce the advisor’s costs but increase the client’s expenses, or inaccurately bill by not including certain transaction costs in the wrap fee. This SEC cautions that this could happen when firms face a need to reduce their own expenses.
Is a Wrap Account Right for You?
Wrap accounts can be a good fit for hands-off investors who want to rely on a professional investment manager to handle their portfolio. In exchange for a fee, you let the portfolio manager handle the day-to-day details and know that your interests are aligned because their compensation will grow as your portfolio does.
At the same time, wrap accounts can also be a good fit for active investors who like to make frequent trades. Because the account charges a single fee, you don’t have to worry about per-transaction fees, which may help keep costs lower.
Buy-and-hold investors who prefer to build a long-term portfolio and make few changes will likely be better off with a traditional investment account. The fee for a wrap account will be much higher than the fees you pay for making relatively few transactions each year, meaning a traditional account will help you increase your portfolio’s performance.
What Fees Should I Be Reviewing In My Investment Account?
For your investment account, you should know the assorted fees that can affect your overall returns, especially as they take away from the amount compounding over time. Here are some of the fees to watch for:
- Management fees: These are typically a percentage of your assets under management and cover professional management and investment advice.
- Transaction fees: These are charges incurred each time you buy or sell securities. Unlike wrap accounts, where such costs are generally included, each transaction may have an associated fee in regular investment accounts.
- Expense ratios: For investments in mutual funds or exchange-traded funds (ETFs), the expense ratio is important when comparing funds. It’s the annual cost of all the fund manager’s costs expressed as a percentage of assets under management.
- Load fees: Some mutual funds charge load fees, which can be charged when you buy shares or on the back-end when you sell shares.
- Account maintenance fees: Many accounts have annual or monthly maintenance fees, regardless of trading activity.
- Performance fees: For accounts managed by hedge funds or high-performance investment managers, you might have performance fees, which are charged based on the returns.
How Can I Reduce My Investment Account Fees?
Reducing your fees is a part of maximizing your returns. Here are some strategies to consider:
- Choose low-cost investments: One strategy is to opt for investments with lower expense ratios, like index funds or ETFs, which generally have lower fees than actively managed mutual funds. When comparing fees, however, this is only one of many factors to use since investments that don’t fit your risk profile or financial objectives will cost you in the long run.
- Consider fee-only advisors: These advisors charge a flat rate or a percentage of assets under management, which can be more cost-effective than commission-based advisors, especially if you make frequent trades.
- Consolidate your accounts: By putting your investments with one provider, you might reduce fees or receive a lower rate once you increase your total investments.
- Education: If you’re newer to investing, becoming more knowledgeable will reduce your reliance on investment vehicles and advisory services that increase your costs.
- Negotiate Fees: Generally, you’ll need to invest a considerable amount before fees become negotiable. That said, some firms may reduce or waive certain fees based on your account size or investment activity.
- Monitor your account activity: As with any other bill, regularly review your account statements to track and verify listed charges.
What Are The Downsides to Wrap Accounts?
For one, wrap accounts have a higher minimum balance requirement than many traditional investment accounts. The fees are also considerably higher than self-managing your investments and robo-advisor services.
The Bottom Line
Wrap accounts give investors access to a professionally managed investment account with a simple fee structure. For investors who want professional advice and assistance, a wrap account can offer them in exchange for 1% to 3% of your account’s assets. Those who feel more comfortable managing their own investments or who prefer to build a long-term buy-and-hold portfolio may be better off with a traditional investment account.