The term wrap account was created to refer to a product offering a multitude of investment or brokerage services “wrapped” in a single fee. Initially, the wrap business was a niche product used primarily by institutional investors and ultra-high-net-worth individual investors.
The wrap industry has since broadened its offerings to become accessible to many retail investors; these new accounts are often known as managed money accounts. These services offer a variety of benefits but may not be the best choice for all investors.
Key Takeaways
- Managed money accounts are a type of fee-based investment account that gives investors access to a professional financial advisor.
- Wrap accounts are a type of managed account that have a single wrap fee, which is a percentage of assets under management.
- Other types of managed money accounts include mutual fun advisory programs, fee-based brokerage accounts, and ETF wraps.
- Many managed money accounts have high minimum investments, putting them out of reach for many retail investors.
- Buy-and-hold investors may be better off paying occasional commissions for trades, rather than a quarterly or annual account fee that can eat into returns.
How Managed Money Works
In the brokerage industry, the traditional definition of the term broker refers to an investment professional who helps match buyers and sellers in exchange for a commission. The size of a traditional broker’s paycheck is based on the volume of transactions brokered; if no trades take place, the broker doesn’t get paid, regardless of whether they provided any investment advice to clients.
This role of the broker changed, however, as some brokers started to offer wrap accounts, requiring them to manage money as well as complete client transactions. Thus, brokers took on the responsibilities of advisors, not only completing transactions (a service that on its own does not regard the assets currently within the client’s account) but also providing portfolio management.
When an investment professional, whether a broker or advisor, works with managed-money products, they are paid a flat fee. This fee is recurring regardless of the number of transactions that take place in the investor’s account. Fee-based investing, as this business model is called, compensates investment professionals for the advice they provide, not for the number of transactions that they generate.
Wrap Accounts vs. Managed-Money Accounts
Wrap accounts are a type of managed money account. Traditionally, wrap accounts were a type of account that was primarily available to high-net-worth investors or institutional investors. The fees associated with these accounts made them impractical for the majority of investors.
As advances in technology reduced the minimum required investment, however, the wrap account became available to an audience of affluent retail investors. Wrap accounts are generally available with a single fee, charged either quarterly or annually, to cover all management and administrative expenses, as well as commissions.
This fee is charged based on the total value of assets under management in the account. For example, if your advisor’s fee is 1% and your portfolio contains $100,000, they earn $1,000 per year. If your portfolio grows to $200,000, that same 1% fee is now worth $2,000.
Wrap accounts are generally appropriate for retail investors with a significant amount of money in their investment account. Otherwise, the fees associated with the account may cut into returns. They are also best for investors who want professional advice and hands-on management of their investments. Buy-and-hold investors, on the other hand, may be better off paying occasional trading fees, rather than a monthly or annual wrap fee.
Some firms may use the broader term “managed money” to describe wrap accounts to more easily communicate the product’s benefits as well as its price structure.
Benefits and Drawbacks of Managed Money
Benefits
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Professional advice
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Fiduciary responsibility
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Simple fee structure
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Reduces churning
Drawbacks
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High minimum investments
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Fees reduce profits
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Accessing money
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Lack of transparency
Benefits of Managed Money
- Professional advice: When you invest in fee-based products, you receive the benefit of ongoing consultation with a professional financial advisor. The advisor is responsible for managing your financial plan to meet both your short- and long-term goals.
- Fiduciary responsibility: Managed money advisors have a fiduciary duty to their clients. They are legally required to act in the client’s financial best interests, rather than encouraging them to make trades or purchase products that are in the advisor’s best financial interests.
- Simple fee structure: With a managed money account, the fee structure is predictable, allowing you to plan for fee payments and understand how they will impact your returns.
- Reduces churning: Managed money advisors have a financial incentive to seek out the best available products rather than selling those that pay high commissions. This lessens the likelihood of churning, or making more trades than necessary to generate more commission fees.
Drawbacks of Managed Money
- High minimum investments: Since advisors’ fees are based on a percentage of assets under management, many will only work with clients above a certain net worth. Account minimums can range from several thousand to hundreds of thousands of dollars.
- Fees reduce profits: Even for investors with a high enough net worth to qualify, account fees can eat into profits as your account grows.
- Accessing money: In some cases, it may be difficult to access money from a managed account, whether to invest an additional amount or make withdrawals. You will need to work with your advisor to plan for this more limited access.
- Lack of transparency: Some firms have a history of not disclosing additional fees to managed money accounts. Investigations into managed money accounts have also found that some advisors don’t assess changes to their clients’ financial needs over time to determine whether their managed money accounts are still the best choice.
Types of Managed Money Accounts
There are five primary investment vehicles in the managed-money environment, each offering different features and benefits. The particulars of each vary based on the firm providing the services, but here are the general categories:
Traditional Managed- or Separate-Account Programs
Unlike mutual funds, where many investors pool their assets to access the services of a professional money manager, traditional managed-account programs (also known as “separate accounts“) allow investors to contract the services of a professional money manager for an account that is separate and distinct from the accounts of other investors. These services include significant tax management and portfolio customization. Investment decisions are based on the investor’s individual needs, not on the generic needs of a portfolio designed to represent a pool of investors that may number well into the thousands.
Mutual-Fund Advisory Programs
The term “mutual fund wrap” has largely been replaced by “mutual fund advisory program” to describe a portfolio of mutual funds selected to match a preset asset allocation model appropriate for an investor’s goals, offered in a single investment account together with the services of a professional investment advisor. The account is automatically rebalanced to maintain the asset allocation model and provides consolidated performance reporting regardless of the number of mutual funds in the model.
A variety of asset allocation models are available with equity-to-fixed-income proportions, such as 100% equity, 80/20, 60/40, 50/50, 40/60, 20/80, or 100% fixed income. A professional financial advisor works with the investor to determine which asset allocation model is appropriate for the investor’s goals, risk tolerance, time horizon, and other considerations, and provides ongoing guidance in the pursuit of the investor’s financial objectives
Fee-Based Brokerage Accounts
Unlimited trading with no commission fees makes the fee-based brokerage account an attractive tool for frequent traders. The fee includes ongoing guidance of a professional financial advisor and provides a measure of comfort for the do-it-yourselfer who prefers a bit of expert assistance.
Multidiscipline Accounts
Multidiscipline accounts combine the services of multiple separate account managers into a single portfolio. This portfolio offers all the benefits of a traditional managed-account portfolio—and more—at reduced investment minimums. Activities across each of the different managers of the portfolio are coordinated by an overlay manger to maintain compliance with the wash-sale rule and minimize capital gains tax liabilities.
ETF Wraps
ETF wraps are one of the latest entrants to the managed-money arena and are similar to mutual fund wraps but use exchange-traded funds instead of mutual funds as their investment vehicles. Since ETFs have lower expense ratios than mutual funds, ETF wraps have a strong appeal to cost-conscious investors.
What Help Does a Managed-Money Account Advisor Provide?
A managed-money advisor is responsible for helping clients create a financial plan that will meet both short- and long-term financial goals. These can include examining your overall financial situation, determining your risk tolerance, helping you set goals, recommending an asset allocation that is appropriate for your goals, assisting with investment selection, and monitoring your portfolio and the progress toward your goals.
Who Can Benefit From a Managed-Money Account?
Managed money accounts can be appropriate for many retail investors as long as they have a high enough level of assets under management to make the annual fees worthwhile. Particularly for active traders, the annual fee on this type of account may be less expensive than paying a fee for every transaction.
What Is a Retail Investor vs. Institutional Investor?
An institutional investor is an organization or company that invests on behalf of other organizations or companies. A retail investor is an individual who invests their own money.
Are Mutual Funds Managed-Money Accounts?
A mutual fund is technically a type of managed account, since a manager looks after the fund and rebalances it periodically to continue meeting the funds objectives. Mutual funds are a kind of managed money account generally has very low minimum investment requirements, making them more accessible to everyday investors.
The Bottom Line
Managed money offers a degree of convenience and peace of mind that few other investment options can provide. These features have made fee-based investing and managed-money investment vehicles popular among affluent retail investors. But these vehicles still pose some complexity that makes them unsuitable for investors with lower net worths or who want to pursue a buy-and-hold investment strategy.
Before opening any kind of managed money account, consult a professional financial advisor to find out if it’s right for your portfolio and investment objectives.
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