Wrap Account

What Is a Wrap Account?

A wrap account is an investment portfolio that is professionally managed by a brokerage firm for a flat fee that is charged quarterly or yearly. The fee depends on total assets under management (AUM). It is exhaustive, covering all administrative, commission, and management expenses for the account.

Wrap fees range from around 1% to 3% of AUM.

For some investors, a wrap account ends up being more affordable over the long haul than a brokerage account that charges commissions for trading activity. Nonetheless, the buy-and-hold investor who rarely sells holdings may be better off with a commission-based fee structure.

Understanding the Wrap Account

A wrap account enjoys the benefit of protecting the investor from overtrading, which can happen on the off chance that a broker buys and sells assets in the account unnecessarily to create more commission income. This is known as "beating."

In a wrap account, the broker is paid a percentage fee in view of the total assets in the account and hence is boosted to get the highest conceivable return on the amount invested.

Wrap Accounts Vs. Traditional Accounts

A wrap account offers an individual investor access to professional money managers who work principally with institutions and high-net-worth individuals. Mutual fund companies likewise offer wrap accounts with access to a large selection of mutual funds.

A wrap account might require a $25,000 to $50,000 least investment. A mutual fund account with a wrap fee generally has a much lower initial investment requirement.

Investors who buy and hold stocks long-term might be better off with a traditional fee structure.

The fees pay for marketing and distribution costs as well as the payments to brokers who sell the funds and work with clients. This fee is an extra charge to a mutual fund wrap account investor.

Special Considerations

A wrap account turns out best for the investor who needs a degree of involved management and counsel. Investors who utilize a buy and hold strategy for a stock portfolio might be better off paying an intermittent trading fees that the account causes.

For instance, an income-situated investor might hold a portfolio of dividend-paying stocks and bonds, and make hardly any changes for quite a long time. In the event that the investor, sells the stocks, substantial capital gains taxes could be owed on the grounds that the cost basis of each stock might be far below the current market price.

The investor might be better off holding the portfolio to earn the dividend income. No capital gain taxes are incurred, and there are no commissions or wrap fees to pay.

In this case, moving the assets into a wrap account would have produced more costs and diminished the investor's total return.

Highlights

• For active investors, a wrap account might be more affordable than one that charges a commission for each trade.
• A wrap account is a flat fee for brokerage services in light of total assets under management.
• In a wrap account, the broker's incentive is to boost gains as opposed to produce trading fees.