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Are You Wrapped Up in an Unsuitable Wrap-Fee Program?

Meyer Wilson

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 away.”

According to SEC rules, brokers must provide investors with a brochure that explains the services included in the wrap-fee program prior to finalizing the contract.

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.

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