Wrap accounts, in which brokerage account costs are "wrapped" into a single or fixed fee, are great if you don't have time to invest on your own and wish to have a money manager take care of your assets. Charges are on a flat quarterly or annual basis, covering all administrative, research, advisory and management expenses.

There are two variations of wrap accounts: traditional and mutual fund. A traditional wrap account offers many different types of securities to meet the investment needs of the individual investor. The main attraction of traditional wraps is that they offer investors access to one or more investment managers to manage their funds. A mutual fund wrap account is a basket of mutual funds that caters to the investment goals of the investor.

The advent of wraps has allowed smaller investors to access professional portfolio managers, which were once only available to large institutional investors and the extremely wealthy. A traditional wrap typically requires an initial investment of at least $25,000. But with their ever-increasing growth and popularity, the deposit minimums are continually being lowered. Mutual fund wraps have relatively smaller investment minimums of as low as $2,000.

Another advantage to a wrap is that it protects investors from overtrading, or churning. This is when a broker or money manager trades an account excessively to create extra commission. Because the wrap account is charged a flat annual fee, the most you can be charged is the fixed percentage, usually 1-3%, of your account's assets.

Advisor Insight

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.