Definition and Example of Wrap Fees
How Wrap Fees Work
How Much Do Wrap Fees Cost?
Definition and Example of Wrap Fees
Wrap fees are the amount that investors pay their financial advisor to manage their wrap account. These fees cover all the administrative, advisory, and brokerage services associated with their account. The wrap fee is based on a certain percentage of the market value of the assets held in the account.
How Wrap Fees Work
The Securities and Exchange Commission (SEC) requires that investors be provided with a wrap fee program brochure before entering into a wrap fee program agreement. This way, investors are informed of any information they need to know about the agreement – including what the wrap fee will be and what services they will receive in exchange for paying that fee. The brochure will also clarify the role of your investment advisor.
Wrap fees may not cover the following services and fees, so you will need to ensure the services offered under your wrap fee program:
- Investment advice: This may include financial planning, portfolio management, and guidance in selecting other investment advisors.
- Transaction costs: Brokerage costs cover the costs of executing trades (i.e., transaction costs associated with buying and selling securities). Your broker may participate in providing research or recommendations about investments.
- Administrative expenses: Sometimes administrative expenses such as custodial fees are included as part of the wrap fee.
- External service provider costs: Wrap fees typically cover any services provided by an external service provider to your investment advisor for your wrap account – but it’s good to double-check here.
How Much Do Wrap Fees Cost?
Wrap fees typically depend on a certain percentage of the total market value of the investment account rather than the number of transactions the advisor conducts.
Bundled investment services under a single fee can save you money, but that is not a guarantee. In some cases, wrap fees can be more expensive than obtaining all necessary services separately. It’s important to shop around to ensure you’re not overpaying.
Here is when the wrap fee helps you save money as a advisory client. If your advisor engages in a lot of trading activity for your account, you won’t have to pay for executing all the different trades. If there is little or no trading activity in your advisory account, or the trades being made do not incur transaction fees, you may not get value for the wrap fee you pay.
If you are currently paying a wrap fee and are unsure if you are getting enough value for what you are paying, review your account statements to assess how much trading your advisor is doing.
Generally, annual wrap fees range from 1% to 3% of the account value. This percentage can also be on a sliding scale, where investors pay a lower percentage if they have a higher account value.
Some investors prefer to pay an annual wrap fee instead of commissions. This is because they feel more confident that their advisor is not incentivized to make more frequent trades than necessary just to earn a commission.
When you pay an annual wrap fee, the only way for your advisor to increase their income is to increase the value of your account, which benefits both parties.
Key Takeaways:
- Wrap fees are what investors pay their financial advisor to manage and service their accounts.
- These fees cover the costs of services such as investment advisory, brokerage services, and administrative expenses.
- Annual wrap fees depend on a percentage of the account value (typically from 1% to 3%).
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