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 churn trades to generate commissions excessively. 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.