Quite common in the US, a wrap account is simply an account in which an advisor manages the investor's portfolio for a flat quarterly or annual fee. This fee covers all administrative, commission and management expenses.
There are two variations of wrap accounts: traditional and mutual fund. A traditional wrap account offers different types of securities to meet the investment needs of the individual investor. Also known as a mutual fund advisory program, a mutual fund wrap account gives investors access to a large pool of mutual funds for one annual fee. In other words, that one fee is supposed to "wrap around" all your mutual fund activity, giving your investor a clear picture of what is paid to you. These mutual fund wrap programs can be offered by you to give customers another pricing option besides paying an upfront commission per transaction.
Wrap fees are generally set up to be a percentage of the assets under management. The wrap fee is intended to provide payment for all the direct services the customer receives as well as cover the administrative costs incurred by the advisors.
How it works?
The wrap account comes in two versions: discretionary and non-discretionary.
Discretionary: Investors work with a professional financial advisor to map out their personal financial goals. Based on those goals, the advisor reviews the offerings in the wrap account and selects the asset allocation model that matches the investor's goals. A wrap account offers a diversified portfolio, professional advice and guidance, ongoing due diligence of the investments in the portfolio and automatic rebalancing of the portfolio to maintain the desired asset allocation. The discretionary wrap account delegates authority to the financial advisor to make changes to the asset allocation model and to add or remove mutual funds from the portfolio without approval from the investor.
Non-Discretionary: In the non-discretionary wrap account, the investor and the financial advisor review a list of funds that have been pre-screened and selected for inclusion in the program and choose funds from that list to create a customized asset allocation model. The investor is responsible for providing approval of the rebalancing of the portfolio and for the decision to replace any of the mutual funds.
Recommendation: A wrap account makes you a de facto portfolio manager for the client’s mutual fund holdings. It is a great way to demonstrate to your clients the value addition made by you and consequently confers on you a legitimate right to charge a wrap fee or advisory fee.
