Learn more about wrap accounts and how their fee structure works.
Definition and Example of a Wrap Account
Wrap accounts are investment accounts that come with a “wrapped” fee or fees. Essentially what that means is all costs to manage and maintain the account, including brokerage and administrative expenses, are covered by this wrap fee. Typically, that fee or set of fees is determined by the total market value of the investment account. For example, let’s say your assets are growing and you no longer feel capable of managing your investment portfolio without professional help. However, you may not be ready to pay for full-scale wealth management services. Wrap accounts provide a happy medium for accessing professional money management services more affordably.
How Wrap Accounts Work
With a wrap account, money managers invest and manage a group of investments. This group may include individual securities or funds. When you have a wrap account, you’ll receive brokerage services and guidance around how to invest. In addition, the financial advisor will help manage your portfolio. All of these services are covered under an annual fee calculated using a certain percentage of your assets. Wrap accounts are a fairly convenient investment account, as they consolidate multiple investments under one source of administration. The investments in a wrap account can either be direct investments or managed funds. Having an annual account fee, instead of paying commission, can give investors peace of mind that their financial advisor won’t make decisions for their account based on a desire to charge commission fees. The wrap-fee structure eliminates the motivation to trade frequently with the intent to generate commission. With a wrap account’s annual fee, your advisor only earns more if you earn more, giving you both a vested interest in growing your investment portfolio. A wrap account’s annual fees usually range from 1% to 3% of the account’s value and are based on a sliding scale. The larger the investment account’s value, the lower the percentage for the annual fee. There is a certain level of financial commitment associated with wrap accounts. After establishing one of these accounts, the investor must maintain a minimum account value of $25,000, and some wrap account programs require a higher minimum amount. With wrap accounts, inventors can invest in a diverse array of investment products including equities, mutual funds, fixed income (debt) instruments, and ETFs. This flexibility helps investors diversify their portfolios.
Pros and Cons of Wrap Accounts
Pros Explained
Professional investment support: Receive ongoing support and investment management for your portfolio.Simple fee structure: Pay a consolidated annual fee based on account value—not the number of transactions.Annual fees align interests: The more your wrap account grows, the more you and the financial advisor make, so you’re both motivated to achieve growth.
Cons Explained
Some conflicts of interest: Because advisors won’t make more for trades, they may choose to trade less frequently than is in the best interest of the account.Misbilling can lead to overcharging: Sometimes inaccurate billing occurs by failing to incorporate some covered transaction costs into the wrap fee. This leads to the investor being overcharged.
