What is a wrap fee?

An all-inclusive fee for the services of an investment manager or adviser is known as a wrap fee. The wrap charge includes investment advice, research, brokerage services, and administrative costs.

The account’s assets determine the charge and typically run between 1% and 3% of the assets under management annually.

The wrap fee increases predictability and streamlines investment expenses. It might be a viable alternative for an actively involved investor who consistently requests complete services from an adviser or investment manager. An investor needs to keep a portfolio of assets for an extended period and plan to make regular changes to be more advantageous.

When presented with an option, the wise investor determines precisely what the wrap charge covers and does not cover. Each company designs its wrap-fee schedule; some are more extensive than others.

Understanding Wrap Fees

One advantage of a wrap fee is its consistency. Regardless of how much or how little the advisor’s services are employed, the investor knows the entire cost upfront.

The wrap charge may not cover some services or costs. Investment companies must provide a wrap-charge pamphlet outlining the benefits and expenses covered by the fee.

As a wrap fee covers all direct services provided to the client, it might be a smart choice for investors who plan to use their broker’s complete range of services.

Commissions, trading fees, advisory fees, and other investment-related costs are all included in the wrap fee. The fee could also cover the investing firm’s administrative expenses.

Investors must determine if the services they need regularly from their advisers justify a 1% to 3% fee. If an investor constructs a strong portfolio and stays away from it during market fluctuations, the one-time costs of sporadic modifications may be less expensive.

Particular Points to Remember

Programs for wrapping fees may go by many names, including mini-accounts, individually managed accounts, asset allocation programs, and investment management programs.

Whatever the name, Rule 204-3(f) of the Investment Advisers Act of 1940 may require more disclosure for this kind of account. “Programs under which any client is charged a specified fee or fees not based directly on transactions in a client’s account for investment advisory services (which may include portfolio management or advice concerning the selection of other advisers) and execution of client transactions” is what this rule defines as a wrap fee.

The Securities and Exchange Commission (SEC) published an investor bulletin in December 2017 that includes some basic information on wrap-fee programs and questions about asking an investment adviser before creating an account.

Benefits and Drawbacks of Wrap Fees

Investors benefit from a certain level of certainty from wrap fees. Regardless of how much or how little they want from their advisers, they know the upfront charges associated with their accounts.

The claim that some brokers engage in excessive trading to increase trading fees is a frequent one. The wrap charge takes away any motivation to trade often.

One potential drawback of the wrap charge is that it can obligate some investors to pay for a service level they never use. Passive investors may be overpaying for research and advice they won’t utilize. At 1% to 3%, conservative investors may discover that the wrap cost consumes most of their yearly investment returns. The following extensive breakthrough stock is something other than what investors who own most or all of their assets in exchange-traded funds search for.

In certain circumstances, the pay-as-you-go plan could be a preferable option.

Investment costs may reduce returns in either case. As previously noted, fees for wrap accounts may range from 1% to 3% of the total assets managed. This is a significant expense, particularly for clients with smaller investment portfolios. Individual investments may be more advantageous for people who can’t pay wrap fees and would take a passive purchase-and-hold approach. Moreover, investors who own wrap accounts can be responsible for extra costs, including those associated with an expense-ratio mutual fund.

What constitutes a fair wrap fee?

A wrap fee typically consists of an annual fee of 1% to 3% of the assets under management. What it covers determines if that is acceptable. Certain costs may not be included in the package price.

Investment advisers are required by Securities and Exchange Commission (SEC) requirements to provide a wrap-fee program brochure to their customers, outlining the services and costs that are covered by the fee.

Certain costs, such as those assessed by a mutual fund provider or fees associated with third-party providers, may still need to be paid by the investor. A wrap fee may not even cover certain rare brokerage expenses.

Does a wrap fee make sense?

The amount and frequency of assistance you need from your financial adviser will determine whether or not paying a wrap charge is worthwhile. You may not need a wrap fee if you are confident that your money is in capable hands and don’t need to review your investment choices often.

The wrap fee covers trading fees, associated administrative expenses, and expert advice and research services. Should you only regularly use some of those services, the basic pay-as-you-go plan can be a superior fit for you.

How are wrap fees determined?

The specifics differ since each financial advisory business develops its fee model.

Fortunately, the company must provide a wrap-cost booklet listing all the services included.

Conclusion

• An all-inclusive price for services an adviser or investment manager provides is a wrap fee.
• Generally, the charge covers commissions, trading fees, account administration, investment advice, and other costs. It may not pay for all potential costs.
• Wrap costs typically range from 1% to 3% of the managed assets annually.