The wrap sheet: wrap fee programs bundle your investments into one neat package

Entrepreneur, May, 1998 by Lorayne Fiorillo

Once the domain of only the wealthiest investors, even the less well-heeled can now participate. So why bother with an account that does it all for you when you can seemingly just as easily do it yourself? If you have the time to follow capital markets nationally and abroad; understand annual reports and analysts' findings; follow an asset allocation model; and amass enough information on companies of all sizes to make decisions that could affect your financial future, step right up and take a crack at it. (And that's just for the stock market. Don't forget the bond market: In case stocks don't keep going like the Energizer Bunny, you'll be glad you diversified your holdings.) But if you'd like to know your money is working as hard as you do and still have time to breathe, perhaps a little help wouldn't be a bad idea.

If you consider that the number of mutual funds investing in stocks is larger than the number of stocks listed on the New York Stock Exchange, you'll soon realize you have your work cut out for you. Here are answers to some FAQs to help you decide what's best:

Q: Are wrap accounts for me?

A: That depends on your financial goals and how much money you want to commit. Wrap programs are designed to address the needs of investors who seek professional management of their assets but don't meet the minimum account size - which, in many cases, exceeds $1 million - associated with the industry's top investment managers. A wrap program can invest assets in many types of securities, including common stocks; government, municipal or corporate bonds; convertible bonds; preferred stock; and foreign investments.

Q: Why choose a wrap program?

A: In addition to giving you access to the financial industry's leading investment advisors at lower minimum account sizes, many programs provide objective third-party monitoring of your manager's performance. Also, to make it on the list of managers working for national brokerage firms, managers must meet minimum standards of legal compliance, assets under management, organizational support, relative performance with a verifiable track record, and investment philosophy.

Q: Isn't my stockbroker an investment advisor?

A: While your broker may give good investment advice, most retail brokers are registered representatives, not Registered Investment Advisors, who must be registered with the Securities and Exchange Commission. (See "Personal Finance," December 1997.) While some brokers provide individual portfolio management on an all-inclusive fee basis, yours is probably not a Registered Investment Advisor. Brokers can introduce an array of independent money managers to their clients with the intent of allowing a manager to personalize a program for them. These managers usually have discretion over all trading in their clients' accounts. In this case, your broker's role is to ensure the manager selected is appropriate for your goal. The broker can oversee every aspect of the manager-client relationship, monitoring manager performance and client expectations. Brokers can also recommend firing a manager who is not serving the client's best interest.

Q: What is the minimum investment?

A: That depends on the type of account you want to establish. Individual managers have different minimum investments, but many equity portfolios begin at $100,000.

Unfortunately, no one manager always outperforms in his or her respective market sector or management discipline. Because of this, most advisors recommend diversifying into several different accounts. In these instances, true account minimums may be closer to $300,000 with total investable assets of at least $500,000. In some cases where mutual funds are used in a bundled account, the minimum is lower. More on this later.

Q: What kind of fees are involved with this type of account?

A: As mentioned earlier, wrap accounts are established on an all-inclusive fee basis, often called, you guessed it, a wrap fee. In some cases, the fee starts at 3 percent for a $100,000 account and decreases as the account value increases. On assets that exceed $5 million, the fee is approximately 1 percent. The wrap fee covers the money manager's fee, all commissions and transaction costs, ongoing oversight, reviews, and performance-monitoring. There is usually no entrance or exit fee. You are free to terminate the relationship at any time without penalty. Any unused portion of the fee will be returned on a pro-rata basis.

Q: Three percent sounds like a lot. Why not just invest in a mutual fund?

A: At first glance, the average fee is enough to give you vertigo, but think about it carefully. Unless you're investing in an unmanaged index fund, most funds have management fees and transaction fees that can average 2.5 percent annually. If you buy a fund with a front- or back-end load, your total fees may exceed this average.

Wrap accounts are designed to help you meet your specific financial goals. They take into account your investment style, risk tolerance and need for liquidity, among other things. In contrast, with mutual funds, you're part of a pool of investors, which offers you two of the very same important benefits offered by separately managed accounts: diversification and professional management. The difference can be seen when the stock market experiences volatility. Here, redemptions by panicky investors may force portfolio managers to sell part of their holdings when prices are low, just to meet redemptions. Individual portfolio managers, on the other hand, can sell stocks when the time seems right; proceeds from these sales can be held as cash or short-term instruments until prices are low enough to buy different stocks at the most advantageous prices.