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wrap account is a form of managed money that conveniently combines — or
wraps — commissions and management costs into one fee, (mutual
funds have imbedded costs that are not transparent or included within
the fee — that is, the internal expenses that make up the expense
ratio) based on the value of the assets within the plan.
The opposite of a do-it-yourself plan, these accounts appeal to investors
who either prefer to leave the challenges of investing to professionals
or don’t have the time to manage their own accounts.
Clients pay an annual fee to have their portfolios managed rather than
pay commissions each time securities are bought. Lower costs and expanded
features make wrap accounts an increasingly popular way to get professional
portfolio management. It’s a Wrap Account
There are two basic types of wrap accounts: traditional wrap accounts that
offer a variety of investments and mutual fund wrap accounts that are only
made up of mutual funds.
In today’s competitive market you can find a wide range of wrap accounts
in these categories with a variety of different approaches from many companies.
For example, pooled wraps offer unique pools of a variety of investments
instead of mutual funds. While a mutual fund can be bought and sold by
almost anyone, pools are more exclusive and are managed by investment counselors
or portfolio managers.
On the other hand, Private Managed Accounts (PMA) are highly customized
and typically require high minimum investments ($500,000) but charge low
management fees (often half of those for a retail mutual fund or many pooled
wrap accounts).
To get the right wrap for you, be sure to comparison shop. A variety of
wraps are available from a wide array of vendors, including banks, broker/dealers,
investment advisors, insurance companies, mutual fund companies and others.
Before you invest in a wrap account, consider these basic questions:
•
What are the fees and what are the minimum investments? (Generally the
more money you have to invest, the more likely you are to be able to negotiate
fees.)
•
How many investments, or pools, are there to choose from? (If one doesn’t
perform to your expectations, what alternatives do you have?)
•
Who are the managers and what are their track records? (How have they performed
in the past?) Past performance may not be used to predict or project future
results.
•
What are the tax benefits? (Are the fees deductible?)
•
Are there other advantages of the wrap account (e.g. custom reporting functions,
personalized portfolio allocations, etc.)
Wrap benefits
Many experts believe that a wrap account gives investors objective advice
and guidance and more choice than other investment options. Wrap account
clients benefit from having an organized process and direction to the management
of their assets as well as the confidence of knowing their funds are managed
with expert skill.
Furthermore, because the fee is based on the amount of the assets you invest,
rather than on each transaction, it can help reduce investor worries of
being advised to buy or sell to increase broker commissions. The only incentive
for the wrap account manager is to help ensure the best-producing products
are in your portfolio.
How wraps work
A professional financial advisor should interview you to find out about
your investment personality, risk tolerance, time horizon and goals. With
this information the advisor will use a software program to choose a mix
of asset allocations among stocks, bonds and cash, or, in the case of the
mutual fund wrap account, an array of mutual funds to fit your needs. All
trading, transactions costs, quarterly performance monitoring, rebalancing
when the market changes, regular visits to reexamine goals, client reporting
and administrative services are typically included in the annual fee.
Traditional wrap accounts typically require a minimum investment of $100,000.
Most mutual fund companies offer wrap programs with a much lower minimum
investment of between $10,000 and $15,000. However, the minimum investment
standard is quickly diminishing based on the popularity of wrap accounts.
Assets in mutual fund wrap accounts total $82.5 billion and have grown
at an annualized rate of 65 percent in the past three years, according
to CNNMoney. There are approximately 68 mutual fund wrap programs currently
available to investors.
Fees associated with wrap accounts can range between 2.0 percent and 3.5
percent of assets annually. Mutual fund wrap accounts can also charge sales
commissions, which means you may have to pay a front-end load when you
buy or a redemption fee when you sell.
Are wraps right for you?
If you are a hands-on investor who enjoys doing all your own research and
you are knowledgeable enough to make your own asset-allocation decisions
as well as have the time to monitor and adjust your portfolio, a wrap-account
may not be the best choice for you. However, if you are not an experienced
do-it-yourselfer, the advice of a qualified financial advisor and portfolio
management services you should receive with a wrap account can help provide
peace of mind and may prove to be money well spent.
American Express Financial Advisors Inc. Member NASD. American Express
Company is separate from American Express Financial Advisors Inc. and is
not a broker-dealer. |
