How a Wrap Fee Program Works - SmartAsset

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, which is a consolidated fee structure for your investments. If you’re looking for professional help to navigate your own investment portfolio, consider finding the right financial advisor that has a fee structure you can live with.

What Is a Wrap Fee Program?

A wrap fee is a consolidated fee structure for 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 a 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 of 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.

How Is a Wrap Fee Calculated?

Every firm that you work with will have its own wrap fee program with specifics as to what they charge and how it is calculated. This makes a wrap fee calculation vary quite widely. If you decide to move forward with a firm that offers a wrap fee program then they are required to provide you with a brochure that details all of the fees you potentially could be paying. You can work with a financial advisor who has a fiduciary responsibility to put your needs first to see if a wrap fee program might make sense for you.

What Is a Reasonable Wrap Fee?

While the wrap fee costs are going to vary widely, you can expect a reasonable fee to be around 1-3%, based on how much you have invested with the firm. There could also be additional charges for the management of your funds on top of this percentage of AUM. For example, outside mutual fund providers are likely to charge additional fees that are often passed on to investors. Don’t be surprised if the broker also passes on additional management fees to you.

Is a Wrap Fee Worth It?

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.

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.

The Bottom Line

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

When you’re trying to make a financial plan or make decisions on your portfolio, it can really pay off to have a professional helping 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. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re just getting started in investing, 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.