When you're looking for a professional to manage your investments, you may encounter a number of fee programs. One of these is called a wrap fee, and it's important to understand how it works. Read on to learn about this type of investment program.
What is a wrap fee?
There are different ways that financial professionals can be paid for their services. Many take a fee for each transaction they initiate, whether a percentage or a set fee, while others charge by the portfolio.
A wrap fee is when a financial professional charges you a base percentage of your portfolio for all the work they do for you, no matter how much. This fee generally ranges from 1% to 3% of your portfolio's value, which can help incentivize them to help you grow your portfolio further.
What is covered by a wrap fee?
There is no standard set of services that are covered by a wrap fee; they're set by individual brokers or financial advisors. It can really pay to shop around and find out where you can get the most bang for your buck.
In general, you'll find that wrap fees include things like advice and research services, trading fees, and administrative costs, although it can also cover additional items, as well. Each brokerage you encounter is obligated to disclose the coverage of their wrap fees, and you have the right to know exactly what you're getting before you commit.
Some companies will not use wrap fees at all but will insist on per-transaction and other fee structures.
Who are wrap fees for?
Wrap fees are designed for anyone who is looking to pay one set fee for professional portfolio management, but they don't always work out in favor of everyone who chooses them. For example, if you're a heavy trader and want to be able to make a lot of transactions without paying a separate fee every time you do, wrap fees might make sense for you. They'll give you a better idea of what your monthly or annual cost will be for managing your portfolio.
If you're a very set-it-and-forget-it long-term investor, however, a wrap fee may not make the best financial sense. A portfolio full of bonds and stocks that you intend to keep for years doesn't really need a lot of management or handling, and you may spend a lot more money on professional services by using a manager with a wrap fee.
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Benefits of wrap fees
Wrap fees can be really useful for some investors, but they're not beneficial for everyone. Here are a few of the benefits of using a company with wrap fees to manage your portfolio:
Fixing management fees: Unlike portfolio managers who charge per transaction fees and financial consulting fees, your wrap fee should include both in an unlimited fashion. You'll always know how much you owe your financial advisor since wrap fees are fixed and based on your portfolio's value instead of your activity.
Allowing unlimited trades: If you want to make a lot of purchases or trades, or just have a lot of questions, a wrap fee can really work in your favor. Since you're not paying per trade or transaction, you can make more frequent transactions, which may help you grow your portfolio by making more smaller purchases. You can also seek out advice more often without worrying that your education will eat up your nest egg.
Discouraging pointless trades: People sometimes complain that brokers make excessive trades so they can earn bigger commissions in a per-transaction fee structure – but this doesn't happen when there's a wrap fee involved. Although you certainly want to get your money's worth, trading for the sake of trading doesn't always help you and can often hurt you, so it's best that your broker isn't incentivized to make trades that are pointless.
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