When you place your investments in the care of an investment manager or advisor, you’ll often run into various fees. The advisor can charge you a percentage of your assets, a transaction fee per trade, commission fees and more. To remove some of the confusion and clutter that comes with this fee structure investment managers choose instead to charge a wrap fee.
What Is a Wrap Fee Program?
A wrap fee is a consolidated fee structure for a more comprehensive management of your investments. This enables your investment manager to charge one encompassing fee, making for a more convenient investing experience. It also allows them to offer more investment services bundled in one package with the streamlined fee. This bundling can include the management of both retirement and non-retirement accounts, financial advice, brokerage services and more.
Investment managers charge wrap fees as a 1% – 3% of the assets they manage for you. In traditional payment methods, you might pay a percentage plus trading fees or commission fees. While you pay these fees to the same manager, each is listed as its own charge. Wrap fee programs, on the other hand include trading fees, commission fees, administrative costs and other investment expenses in one charge.
You may come across an investment manager who bundles your fees, but doesn’t advertise it as a wrap fee program. The fee concept remains the same, although the program’s alternative names include asset allocation program, asset management program, investment management program and uniform managed account.
The Cons of Wrap Fees
While convenient, wrap fees tend to run a little high. Again, an investment manager typically charges a fee of 1% – 3% of your managed assets. Some investors may charge lower percentages. Due to this unpredictable range, you’ll want to double check your exact fee if you opt to work with a wrap fee program. You may decide you don’t want to work with a particular investment manager if you’re losing 3% of your earnings in fees.
It’s important to note that the Securities and Exchange Commission (SEC) has charged investment management firms with compliance failures in relation to wrap fee programs. These firms failed to disclose to clients what they were being charged for and how much they were being charged. That way, they could charge much more than was necessary under the wrap fee blanket. Due to this unfortunate possibility, you’ll want to request the exact terms and charges of your potential fees when it comes time to choose an advisor and sign a contract. To help give you some peace of mind during your search, it helps to start by looking for a certified financial planner. These advisors are the most educated and experienced out there and are held to a fiduciary duty to their clients.
You’ll also want to keep an eye out for extra fees. Sometimes, the majority of a manager’s fees will be bundled into one wrap fee. However, if you instruct your manager to buy a mutual fund for you and that fund includes its own expense ratio, that charge will come separately.
Should I Pay Wrap Fees?
Wrap fees are appealing for the convenience they add to investment management. Why not pay one bundled fee instead of a bunch of separate itemized fees? A wrap fee program can also help if you plan to take advantage of your manager’s full suite of services. Again, just make sure it’s actually the most cost efficient way to manage your assets. You don’t want to assume it’s cheaper right off the bat. Nor do you want to pay wrap fees simply for its convenience, since you may end up paying more than you would without.
If you’re using an investment manager, a wrap fee program can be extremely convenient. It allows you to pay one simplified fee instead of a number of separate fees. Depending on your manager, you may also be able to use more services for a cheaper price. Just be sure to check exactly what your fees will be before you sign the wrap fee program contract.
Tips for Investing
- If you’re just getting started in investing, it usually pays to have someone help you out. You can go the traditional route and find a financial advisor who you can sit down with and work out your investment plans. A matching tool like SmartAsset’s can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
- If a traditional financial advisor isn’t for you, you could choose a robo-advisor to manage your investments. That way, you can set your goals and deposits and then take a more hands-off approach.
- Not everyone needs an investment manager. In that case, an online brokerage account could easy work for you. This allows you to direct your investments yourself, making your own trading and asset allocation decisions.
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