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Definition and Example of Wrap Accounts

How do wrap accounts work?

Advantages and Disadvantages of Wrap Accounts

Definition and Example of Wrap Accounts

A wrap account is a specific type of investment account where all management, brokerage, and advisory fees are covered by a single fee structure. The “wrap” portion of the name relates to the way management wraps its fees around an investment portfolio.

Learn more about wrap accounts and how their fee structure works.

How do wrap accounts work?

With a wrap account, money managers invest and manage a range of investments. This range can include individual securities or funds. When you have a wrap account, you will receive brokerage services and guidance on how to invest. Additionally, a financial advisor will help manage your portfolio. All of these services are covered under an annual fee calculated using a certain percentage of your assets.

Wrap accounts are relatively convenient investment accounts, as they consolidate multiple investments under a single source of management. Investments in a wrap account can be either direct investments or managed funds.

Advantages and Disadvantages of Wrap Accounts

Advantages:

• Professional investment support: Receive ongoing support and investment management for your portfolio.
• Simple fee structure: Pay a single annual fee based on account value, not the number of transactions.
• Annual incentive alignment: As your wrap account grows, both your profits and the financial advisor’s earnings increase, motivating both parties to achieve growth.

Disadvantages:

• Some conflicts of interest: Since advisors won’t earn more from transactions, they may choose to trade less frequently, which may not be in the account’s best interest.
• Potential for excessive fees: Billing errors may occasionally occur by not including certain covered transaction costs in the wrap fees, resulting in overcharging the investor.

Key Takeaways:

• A wrap account is a type of investment account.
• All management, brokerage, and advisory costs are covered by a single annual fee structure.
• Money managers invest and manage a range of investments in a wrap account.
• Wrap account fees help prevent financial advisors from conducting unnecessary transactions solely to boost their commissions.

Sources:

• Newbridge Financial Services Group. “Wrap Accounts.” Accessed Dec. 31, 2021.

Source: https://www.thebalancemoney.com/wrap-account-5214535