While wrap fees are an attractive option for many investors because they
enable people to pay a single fee for bundled investment services, a thorough
understanding of exactly what services are included in a wrap-fee program
can protect investors from the considerable unexpected expenses that could
result from unsuitable products or strategies.
Understand the Fees in Wrap-Fee Programs
Wrap-fee programs bundle broker or advisor service fees for investment
advice and administrative expenses into a single fee, instead of separating
fees for individual services. Wrap-fee programs are also known as investment
or asset management programs, asset allocation programs, uniform managed
accounts, and mini-accounts, but the defining feature in all of them is
a single bundled fee for account services.
Wrap-fee programs typically have a sponsor, usually a broker or investment
advisor, that administers the program and provides advice to the investor
about the program. Some programs have more than one sponsor. Wrap-fee
programs are based on a percentage of the value of an investor's account,
rather than transactions. Although many investors find it convenient to
pay one single fee for account services,
wrap-fee programs can open doors for investment fraud. If an investor is steered toward a wrap-fee program, he/she must understand
what services are included. Wrap-fee programs often include:
Administrative Expenses and other Fees – Custodial fees, as well as mutual fund fees and expenses are often
included in wrap-fee programs.
Investment Advice – Advisory services such as portfolio management, financial planning,
and advisor selection are sometimes included in wrap-fee programs.
Brokerage Costs – The costs of
buying and selling securities are a major component of wrap-fee programs. If brokers provide research
and/or investment advice, additional costs for mark-ups, mark-downs, or
spreads may result.
Third Party Service Fees – Wrap-fees often include fees for third-party service providers
who sponsor accounts and provide services to investment advisors. If the
broker who executes trades is outside of the wrap-fee program, an investor
can incur additional brokerage fees. This practice is referred to as “trading
According to SEC rules, brokers must provide investors with a brochure
that explains the services included in the wrap-fee program prior to finalizing
To protect investments and prevent fraud, investors who enter into accounts
with wrap-fee programs that bundle fees for broker services should understand
what those fees cover. If you have been the victim of investment fraud,
contact the attorneys at Meyer Wilson at 888-390-6491 for a free consultation today.