Problems with Wrap Accounts

Although wrap accounts concept may sound appealing, there are drawbacks of investing in wrap accounts. Below are some disadvantages of wrap accounts and while doing your mutual fund research, you should look into some of these factors.

The wrap account fees are too high

Wrap accounts usually charge an annual fee of 1-2% in addition to the mutual fund fees that you are already charged by mutual funds companies. Although, some wrap accounts offer D shares or no load mutual funds within the wrap accounts, you are still paying 1-2% on top of those no load mutual funds.

For example, Smith Barney's TRAK program charges 1.5% annually and anywhere from 0.55% - 1.72% in operating expenses for less than 20 investment options. For such a small number of investment options compared to tens of thousands mutual funds available nowadays, it is expensive to have the wrap accounts.

The wrap fees of 1.5% can also be lowered by nice brokers. They have the option of lowering your fees to 1% or less. That just means they get paid less by your investments.

How brokers get paid by wrap accounts

When you invest in wrap accounts, your broker usually does not get paid upfront as he/she would with commissions or front load mutual funds. However, the broker get paid every time you get charged a fee (the 1-1.5%). So, whenever you pay the fee to the brokerage firm, your broker gets a paid.

It is common to pay the 1.5% annual fee quarterly. So, if you invest $100,000 in a wrap account and your fee is 1.5% annually. Over the year, you will pay $1,500 in fees alone (assuming  your investment does not change in value). Instead of paying $1,500 for the whole year, brokerage firms usually charge you $375 a quarter.

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