Are Wrap Fees Worth It?

A wrap fee is a composite fee that some financial advisors charge as an alternative to investment management, custodial fees or other management fees that clients might otherwise pay separately. Wrapping fees typically range from 1% to 3%.

If you’re an active investor — that is, you and your financial advisor buy and sell investments frequently — wrap accounts can save you money because they effectively cover the costs associated with trading (rather than paying per transaction).

If you’re a buy-and-hold investor, meaning you don’t buy and sell investments that often hold your investments for long periods of time or you invest mostly in index funds, target date funds or similar instruments with long-term objectives, rep fees can actually increase your costs and do more harm than good.

Think of the wristband fee as an all-day wristband for unlimited rides at the amusement park. For those who want to enjoy many rides, an all-day pass can save a lot of money compared to paying for each ride individually. But people who just want to get on one or two rides and go home are probably better off paying per ride.

Wrapping fees are usually a percentage of your assets. For example, if the advisor’s wrap fee is 2% and you have $1 million. Assets under managementYour total annual fee will be $20,000. Many advisors charge wrap fees in quarterly installments.

Rep fee programs may also be referred to as “asset allocation programs,” “asset management programs,” “investment management programs,” “money accounts,” “uniformly managed accounts,” or “separately managed accounts.”

They often have sponsors, which are entities that receive a portion of the rap fee in exchange for organizing or managing all or part of the rap program.⁽⁰⁾

Rep fees typically include the following, but be aware – these can vary by advisor. Make sure you ask questions when you meet with your counselor.

• Transaction costs. These are usually the costs that come with buying and selling securities. These may also include research costs.

• Administrative expenses. This may include custodial fees, which are fees associated with holding your securities with a third party.

What the wrap fee may not include:

• Expenditure ratio. Mutual funds and exchange-traded funds often charge investors a percentage fee to cover the cost of running the fund. Wrapping fees are usually not included. Expenditure ratio; They will be withdrawn directly from your investment in the fund.

• Trade away. Your advisor may decide to use a broker-dealer outside of the Rep Fee Program to execute certain trades in your account better or faster than the current custodian can provide (called a “trading period”). These are often separate (and sometimes higher) brokerage fees that are not included in the rep fee.

• Can save money on fees. If you are an active investor who trades a lot, the cost of wrapping fees may be lower than separate custody, transaction and other administrative fees.

• Simplicity. By consolidating fees, a wrap program can reduce the number of fees and invoices you have to deal with.

• Cost Rep fees are typically higher than traditional asset under management (AUM) fees, which can eat into your investment gains, especially for buy-and-hold investors.

• The advisor may encourage avoiding trades. The fewer trades an advisor trades, the higher the envelope fee to the advisory firm. Rip fees can create a conflict of interest for the advisor, as they may encourage the advisor to trade less to avoid losing money on fees.

• The advisor may encourage you to invest in higher cost funds. Rep fee programs can encourage advisors to reduce the trading costs they have to absorb, allowing them to focus more on what it costs to buy or sell a fund rather than how much it costs you to own (the expense ratio).

Wrap fees can save you money under the right circumstances, but they can also create a conflict of interest for your advisor. Here are a few things to look for.

• Unconfirmed recommendations. In an SEC study of more than 100 examinations of financial advisors, SEC staff observed instances where advisors recommended rip-fee programs to clients without evaluating whether the programs were in the clients’ best interests.⁽⁰⁾

• No follow up. The same SEC study found instances where advisers initially considered whether their clients would be better off with rap fees, but did not return later to reassess whether their clients should still be in the rap program. Good advisors should frequently ask you if anything has happened in your personal life that might change your financial situation, financial needs, risk tolerance or the like – and they should apply that information accordingly.

• Abnormal changes in investment recommendations. The SEC study found instances where advisers recommended investments that had higher costs for their rep-free clients (such as mutual funds with higher expense ratios) but lower transaction costs for the adviser (which allowed the adviser to keep higher rep fees).

• Reluctance to let you quit the RapFace program. Advisors may not want to pay certain expenses and transaction fees to move your accounts out of the rep fee program, which could cost them money.

• Ongoing charges for certain fees. Just like a wristband covers all-day rides but not necessarily food, the wrap fee doesn’t necessarily cover everything. Make sure you understand whether you will still have to pay fees for mutual funds or ETFs, options trades, wire and electronic funds transfers, custody costs or other services in your account.

If the wrap fee doesn’t seem fair to you, that’s okay. Most financial advisors offer services in unbundled form so you can pick and choose what you want to pay for and what you don’t. The table below describes other common financial advisor fees.