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Wrap Account

A wrap account is one in which a brokerage firm manages your portfolio for an annual fee, based on total assets under management (AUM). The fee covers all administrative, commission and management expenses.

For some investors, a wrap account represents a cost savings over a brokerage account that charges commissions for trading.


Overtrading Protection

One advantage of a wrap account is the fact it protects you from overtrading. This happens when your broker trades in your account excessively to make more commission income. By receiving an annual fee based on total assets, the broker is more likely to want to keep trading costs down while boosting the value of your account over the long term.

Mutual Fund Accounts Have A Twist

A regular, traditional wrap account may require a $25,000 to $50,000 minimum investment and offers you access to professional money managers. A mutual fund wrap account has a much lower initial investment amount.

However, you should know that your investment broker earns a 12b-1 fee on mutual fund purchases in a wrap account. This fee pays for market and distribution costs and is in addition to the mutual fund wrap account management fee you pay.

Amount Of Advice Needed

If you have a buy and hold strategy for your stock portfolio you may not need to incur the cost of a wrap account annual fee. If your portfolio is made up mostly of dividend-paying stocks and you plan to hold them for many years, it doesn’t make a lot of sense to pay someone to manage them. Moreover, if you sell those stocks, the capital gains taxes could do a lot of damage to your profit.

In this case you would be better off sticking with the dividend income and avoiding capital gains taxes if possible. Moving a portfolio like this into a wrap account would cost you more for little gain.

When A Wrap Account Might Make Sense

If you want someone to manage your account for you and you expect there to be a lot of trading, a wrap account with one annual fee would likely cost less than paying both management and trading costs.

Looking back at the “overtrading” issue above there is also something called “reverse churning." Simply put, if your adviser is paying for trades he may have an incentive to trade less frequently to limit his expenses. So, it’s a matter of balance. Overtrading versus reverse churning.

More Assets Mean A Higher Fee

Another thing to consider is the actual amount of assets under management, i.e., the size of your portfolio. The larger this is, the higher the AUM fee is and there is no advantage when it comes to trading fees. That’s because it costs the same to buy 1 share of stock as it does to buy 1,000.

Again, it’s a matter of balance. Consider the size of your portfolio regarding the wrap fee you will pay and whether that is an advantage over paying for individual trades and other expenses.


Check And Double-Check

Finally, having a wrap fee arrangement is not a “set it and forget it” arrangement. Keep track of what your adviser is doing and how well he is doing. In other words, you are still paying someone to manage your money in a wrap fee situation and just because you are not paying trading fees doesn’t mean there are no costs.

Compare the wrap fee you pay to what it would have cost to pay the individual fees. It’s a simple thing to do and will tell you whether you just paid a premium or received a discount.

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