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As your assets grow and your financial needs become more complex, you may no longer be comfortable managing your investment portfolio on your own. Although you may not be ready for full-scale wealth management services, one simple way you can get professional money management is through a ''wrap account.''
Wrap accounts, which have become increasingly popular in the last several years, also help align a financial advisor's interests with your own through the advisor's fee structure.
Under a wrap account, money managers invest and manage a group of investments that could include individual securities or funds. They provide investment guidance, portfolio management, and brokerage services for an annual fee based on a percentage of your assets.
Many investors prefer an annual account fee over commissions because they feel more comfortable knowing financial advisors will have no motivation to trade frequently just for the sake of generating commissions. With the annual fee, the advisor earns more as you earn more - therefore, you both have a vested interest in increasing the overall asset size of your portfolio.
Annual fees typically range from 1% to 3% of the value of the account. The charges are also usually based on a sliding scale - that is, the larger the account, the lower the percentage charged.
Mutual Fund Wraps
In addition to the traditional consultant wrap, investors can also choose mutual fund wraps. With a mutual fund wrap account, your assets are invested in various retail mutual funds instead of individual securities. While traditional wraps generally require a $100,000 account minimum or more, mutual fund wraps frequently have smaller minimums.
Mutual fund wraps charge not only a wrap fee, but there also may be other expenses associated with the underlying funds. However, mutual fund load charges often are waived, and mutual fund wraps typically have lower wrap fees than traditional wrap accounts.
The basic appeal of wrap accounts is that they provide customized, objective, and ongoing professional investment management of your portfolio. Your portfolio manager will help you assess your goals and objectives in keeping with your tolerance for risk and your investment timeframe. He or she will also provide ongoing monitoring of your portfolio and your investment performance and will rebalance your assets as needed to keep within your desired asset allocation plan.
You can also make sure that wrap accounts are set up to offset other risks. For example, executives who have large holdings of illiquid stock in a particular company can request that the portfolio manager not invest in that company. However, you should be aware of capital gains that can be triggered when selling investments to move the proceeds into a wrap account. Your investment advisor should be able to help you figure out a way to stagger the shift and minimize taxes in the process.
Before investing in a wrap account, it is important to consider your investment strategy, your asset allocation needs, and your trading frequency. Bond investors and investors with a buy-and-hold approach may not stand to benefit from wrap accounts because the annual fee may be higher than any commissions they would otherwise pay. For active stock investors, however, the ability to make unlimited trades for a set fee instead of on a per-trade commission basis could result in large savings.
Carefully assess your situation before settling on a wrap account. Other options may make more sense, but, for some investors, wraps offer benefits they might not be able to get elsewhere.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.