A wrap fee is a payment that investors make to their financial advisor to manage their wrap account. This fee covers all administrative, advisory, and brokerage services associated with their account. Wrap fees are based on a certain percentage of the market value of the assets held in the wrap account.
Learn more about what wrap fees are, what they cost, and what services they cover.
Definition and Example of a Wrap Fee
To better understand what a wrap fee is, it can help to have more context around what a wrap account is. A wrap fee is attached to a wrap account, which is a type of investment account. The term “wrap” comes from the fact that this one fee covers investment advice, brokerage services, administrative expenses, and any other necessary fees or expenses.
Let’s say your advisor charges a 1% wrap fee for wrap accounts with a value of more than $100,000. In that case, if you had $100,000 in your account, you would pay an annual wrap fee of $1,000.
Wrap accounts are rather convenient, as they bundle brokerage services and investment management under one fee.
How Wrap Fees Work
The Securities and Exchange Commission (SEC) requires that investors are given a wrap-fee program brochure before entering into a wrap-fee program contract. That way, investors are aware of any must-know information about the arrangement—including what their wrap fee will be and what services they’ll get for paying that fee. The brochure will also outline what your investment advisor’s role will be.
The following services and fees may or may not be covered by a wrap fee, so you’ll need to confirm what is offered as a part of your specific wrap-fee program.
- Investment advice: This advice may include financial planning, portfolio management, and guidance on selecting other investment advisors.
- Brokerage costs: Brokerage costs cover trade execution costs (i.e., the transaction costs associated with buying and selling securities). Your broker-dealer may also share research or recommendations about investments.
- Administrative expenses: Sometimes administrative expenses such as custodial fees are included as a part of a wrap fee.
- Third-party service provider costs: A wrap fee will typically cover any services provided to the investment advisor of your wrap account by any third-party service provider—but again, it’s good to double-check here.
How Much Do Wrap Fees Cost?
A wrap fee is usually based on a certain percentage of the total market value of the investment account instead of how many transactions are made by the advisor.
Bundling covered investing services together under one fee can save you money, but that isn’t a guarantee. In some cases, the wrap fee is more expensive than obtaining all of the necessary services separately. It’s important to shop around to make sure you’re not overpaying.
Here’s when a wrap fee helps you save as an advisory client. If your advisor pursues a lot of trading activity for your account, you wouldn’t have to pay for the cost of executing all of the different trades. If there is little or no trading activity in your advisory account or the trades being made don’t require a transaction fee, then you may not get your money’s worth out of the wrap fee.
If you’re currently paying a wrap fee and are unsure of whether or not you are getting enough bang for your buck, review your account statements to see how much your advisor is trading.
Generally, an annual wrap fee will range from 1% to 3% of the account’s value. This percentage can also be determined on a sliding scale, with investors paying a smaller percentage if they have a higher account value.
Some investors prefer paying an annual wrap fee instead of commissions. This is because they feel more confident that their advisor isn’t being motivated to make more frequent trades than necessary just to earn a commission.
When you pay an annual wrap fee, the only way for your advisor to generate more income is to make your account’s value grow, which benefits both parties.
- Wrap fees are paid by an investor to their financial advisor for managing and servicing their wrap accounts.
- This one fee covers the costs of services like investment advice, brokerage services, and administrative expenses.
- The annual wrap fee is based on a percentage of the account’s value (usually 1% to 3%).