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What Is a Wrap Fee Program?

Wrap fee programs simplify how you pay for investment management and financial advice. Learn how this fee structure works in this article.

As you start working with a financial advisor firm, you might encounter complicated fee structures. And, on top of an annual advisory fee, you may have to pay additional costs related to the securities you buy, such as for fund management or trading. However, some companies offer a wrap fee program, which ties all the costs together into one clear fee.

This article will help you understand what a wrap fee program is and how it works. We’ll explain how investment management firms calculate your rate and why they often use such a fee structure. You’ll also learn what a reasonable cost is for a given client. Finally, we’ll break down whether or not this structure is worth it.

How a Wrap Fee Program Works

A wrap fee program is an investment account in which you must pay a single rate for a variety of services. These typically include investment advice, administrative costs, and brokerage services. Below is a more specific breakdown of what such a program includes:

  • Investment advice
  • Brokerage services, such as fees related to executing trades
  • Custodial and administrative costs associated with owning certain securities
  • Third-party expenses, which your advisor or firm may use to provide services to you

The benefit of a wrap fee program is that it is more predictable and manageable for you as a client. Rather than sporadic transaction and custodial expenses, you only need to keep track of one cost each year. Essentially, it streamlines the investment management process for you.

According to Jeff Rose, a CFP and founder of GoodFinancialCents, “In a wrap fee program, you’re essentially paying for convenience.” But he cautions that “not everything is covered.” Additional costs like “mutual fund expense ratios (12b1 fees) aren’t included.” He continues, explaining that the “catch is, while it simplified billing, it’s hard for investors to know what their ‘all-in’ cost is.”

When a firm or advisor provides one of these programs, they must typically offer a brochure for clients to look through. This document discloses what a client can expect from a firm’s services, as well as how they’re charged. You can find a copy of each firm’s wrap fee program brochure and its Form ADV by using the SEC’s Investment Adviser Public Disclosure (IAPD) search tool.

Wrap Fee Calculation

When a firm calculates a client’s rate, it will do so by combining an annual advisory fee and additional costs, such as for brokerage services or transactions. Rose explains that “firms generally calculate wrap fees as a percentage of the assets they manage for you.” He further points out that “this percentage” can often vary, “but it’s not always transparent how it aligns with the actual services provided.” Also, keep in mind that accounts with more assets “might see a lower percentage, but this doesn’t necessarily mean better value.”

Keep in mind that, despite what you read in a firm’s wrap fee brochure, the annual rate you pay will be unique. This is because, as mentioned, the cost is largely dependent on your assets under management (AUM). And, because each company has its own processes for calculating a wrap fee, what you pay at one firm may not be the same elsewhere.

What Firms Typically Charge

During your search for a financial advisor firm, you should be aware of what a reasonable or typical wrap fee is. Jeff Rose, CFP, says that a normal rate tends to “range from about 1% to 3% of the assets under management.” But he also warns that “reasonable is subjective” and that with “the lack of transparency and the potential for paying for unneeded services, even a 1% fee can be questionable.”

When you sit down with a professional to discuss their services, don’t be afraid to ask questions to understand exactly what they’re charging. You should also ensure that your fee is appropriate given your asset level.

To give you an idea of what some large firms charge, here’s a table that displays five companies and their accompanying maximum wrap fee percentages:

Advisory FirmWrap Fee Percentage
Ameriprise2.0%
RBC Wealth Management2.5%
Raymond James2.25%
Stifel2.0%
Wells Fargo Advisors2.0%
Note: the fee percentages above are directly from each firm’s wrap fee program brochure and are representative of their maximum fee. What you pay with any of the above firms may be different due to your AUM.

Are Wrap Fees Worth It?

Wrap fee programs are beneficial for their simplicity and convenience for the client. However, they can inflate the rate you pay. Typical programs charge anywhere from 1% to 3% of AUM.

Another consideration is that it can be difficult to know what exactly you’re paying for. Firms typically have a wrap fee program brochure to explain to you what it includes. However, these documents may be difficult to read for the average client and, in some cases, companies may fail to disclose everything. Because of this, be sure to specifically ask your advisor about what the program includes and how it works.

If you plan to be a prolific investor via the firm you’re working with, a wrap fee program may be a good idea. But if executing several trades isn’t necessarily in the cards, you may want to reconsider paying for such a program. In any case, you should sit down with your advisor to discuss what arrangement would be most beneficial and cost-effective.

Frequently Asked Questions

What are the disadvantages of a wrap account?

Wrap fee programs can be expensive, costing around 1% to 3% of AUM. Additionally, it can be difficult to know what you’re paying for unless you conduct thorough research on the firm. Even still, some companies don’t disclose every detail and have been known to face scrutiny from the SEC.

What is a wrap fee program brochure?

A wrap fee program brochure is a client-facing document from a financial advisor firm that discloses what services it provides, its types of clients, and its fee structure. You’ll also typically find information regarding a company’s code of ethics and compensation.

When a firm provides a wrap fee brochure, you can often find them publicly available via the SEC’s IAPD search tool. Alternatively, some organizations offer them through their website’s legal disclosure section.

Is a wrap fee the same as an advisory fee?

Not quite, a wrap fee encompasses an advisory fee, as well as additional costs associated with maintaining your account or from the assets you own. However, both are typically calculated via a percentage of your AUM.

What costs aren’t covered in a wrap account?

Wrap fee programs cover quite a bit, but there may be some additional expenses that fall through the cracks. Shareholder and operating costs from mutual funds are a common example. Before you begin investing through a wrap program, it’s a good idea to make sure you know what you’re getting and what might be extra.

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