What Is A 'Wrap Fee'

A wrap fee is a comprehensive charge levied by an investment manager or investment advisor to a client for providing a bundle of services. Such services can include investment advice, investment research and brokerage services. Wrap fees allow an investment advisor to charge one straightforward fee to their clients, simplifying the process for both the advisor and the customer.

Breaking Down 'Wrap Fee'

Wrap fees are generally set up to be a percentage of the assets under management and can cover both retirement and non-retirement assets. The wrap fee is intended to provide payment for all the direct services the customer receives, as well as cover the administrative costs incurred by the investment firm, which tend to be a full-service brokerage or affiliated or unaffiliated broker/dealer firms. One advantage of a wrap fee is that a customer can be assured that a broker isn't trying to excessively churn trades to generate commissions. Wrap fee accounts are expected to more than double to $1.1 trillion in the next five years, according to Tiburon Strategic Advisors.

Wrap Fee Criticisms

Wrap fees can be expensive. They can range from around 0.75% to as high as 3%. And certain actions could incur other fees, such as if a broker for a wrap fee client were to purchase a mutual fund that charges an expense ratio. Such high fees can quickly erode returns. Accordingly, wrap fee arrangements have attracted a greater level of scrutiny from regulators as of late.

Wrap fee programs can have a variety of names, such as asset allocation programs, investment management programs, asset management programs, separately managed accounts and mini-accounts. Whatever the name, such an account can be subject to additional disclosure under Rule 204-3(f) of the Investment Advisers Act of 1940. That rule defines a wrap fee as a “program 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.” In December 2017, the Securities and Exchange Commission released an Investor Bulletin that provides basic information about wrap fee programs and some questions to consider asking an investment advisor before choosing to open an account in a wrap fee program.   

Who Is A Wrap Fee Right For?

Paying a wrap fee can be advantageous for investors who intend to utilize their broker's full line of services. For anyone else, it might be cheaper to pay an investment professional for individual services in an unbundled arrangement.

RELATED TERMS
  1. Mutual Fund Wrap

    A mutual fund wrap is a personal wealth management service that ...
  2. 10-K Wrap

    A 10-K wrap is a summary report of a company's annual performance ...
  3. Impose

    The term "impose" refers to the act of placing a fee, levy, tax ...
  4. Performance Fee

    A performance fee is a payment made to an investment manager ...
  5. Advisor Account

    An advisor account is an investment account where investment ...
  6. Loan Application Fee

    A loan application fee is a fee charged to a potential borrower ...
Related Articles
  1. Investing

    Wrap It Up: Terms and Benefits of Managed Money

    Read here to find out if you should have your money managed by professionals.
  2. Investing

    8 Investing Fees That You Should Never Pay

    In investment management and financial planning there are a plethora of fees that are unnecessary.
  3. Investing

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  4. Investing

    Everything You Know About Investor Fees

    Investment fees are one of the main determinants of investment returns, and over time, minimizing fees tends to maximize performance. Use this guide today.
  5. Financial Advisor

    How to Talk Fees with Clients

    Talking about fees with clients is not always a fun discussion. Here's the best way to go about it.
  6. Retirement

    How a 1% Annual Fee Can Ruin Your Nest Egg

    What kind of impact does an annual 1% fee have on your portfolio? The answer may surprise you.
  7. Investing

    Are Hidden Fees Eroding Your Participants’ Return?

    Plan sponsors need to know the fees associated with their plan to determine if they are reasonable.
  8. Financial Advisor

    What Hiring a Financial Advisor Costs in 2016

    When it comes to the price tag on a financial advisor's services, transparency is often lacking. That's why it's important to do your homework.
  9. Investing

    How Fees Impact Your Investment Results

    You might be surprised by how much investment fees impact a portfolio's performance.
  10. Tech

    Are AUM Fees a Thing of the Past?

    Although the assets under management fee seemed like a good idea for a long time, current market trends may be making it a thing of the past.
RELATED FAQS
  1. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
Trading Center