A wrap fee is a consolidated fee that some financial advisors charge as an alternative to a la carte pricing for investment management, custodial fees, or other administrative fees that clients might otherwise pay separately. Wrap fees typically range from 1% to 3%.
If you’re an active investor – that is, you and your financial advisor buy and sell investments frequently – wrap accounts could save you money because they effectively cap the costs associated with the trading (instead of paying per transaction).
If you’re a buy-and-hold investor, meaning you don’t buy and sell investments that often, you tend to own your investments for a long time or you are mostly invested in index funds, target-date funds or similar instruments with long-term objectives, wrap fees may actually increase your costs and do more harm than good.
How wrap fees work
Think of wrap fees as an all-day wristband for unlimited rides at an amusement park. For people who want to enjoy a lot of rides, an all-day pass may save a lot of money compared to paying for each ride individually. But those who just want to go on one or two rides and go home will probably be better off paying per ride.
Wrap fees are typically a percentage of your assets. For example, if the advisor’s wrap fee is 2% and you have $1 million in assets under management, your total annual fee would be $20,000. Many advisors assess the wrap fee in quarterly installments.
Wrap fee programs might also be called “asset allocation programs,” “asset management programs,” “investment management programs,” “mini-accounts,” “uniform managed accounts,” or “separately managed accounts.”
They often have sponsors, which are entities that receive a portion of the wrap fee in return for organizing or administering all or part of the wrap program
. For example, a wrap fee program might also involve your advisor hiring other advisors to manage a portion of your assets (just the fixed income investments, for instance).
What a wrap fee typically covers
Wrap fees typically include the following, but beware – this can vary by advisor. Be sure you ask questions when you meet with your advisor.
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Transaction costs. These are usually the expenses that come with buying and selling securities. They might also include research costs.
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Administrative expenses. This may include custodial fees, which are fees associated with housing your securities with a third party.
What a wrap fee may not cover:
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Expense ratios. Mutual funds and exchange-traded funds often charge investors a percentage fee to cover the cost of running the fund. Wrap fees typically don’t cover expense ratios; they will be taken directly out of your investment in the fund.
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Trading away. Your adviser might decide to use a broker-dealer outside of the wrap fee program in order to make certain trades in your account in a better or faster way compared to what the existing custodian can provide (this is called “trading away”). These are often separate (and sometimes higher) brokerage fees that aren’t covered by the wrap fee.
Pros and cons of wrap fees
May encourage the advisor to avoid trading.
May encourage the advisor to put you in higher-cost funds.
Advantages of wrap fees
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May save money on fees. If you’re an active investor who makes a lot of trades, a wrap fee might cost less than paying separately for custodial, transaction and other administrative fees.
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Simplicity. By consolidating fees, a wrap program could reduce the number of fees and invoices you have to deal with.
Disadvantages of wrap fees
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Cost. Wrap fees are typically higher than conventional assets under management (AUM) fees, which can eat away at your investment gains, especially for buy-and-hold investors.
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May encourage the advisor to avoid trading. The less the advisor trades, the more of the wrap fee the advisory firm gets to keep.