Understanding Wrap Fees

Wrap fee programs sound like a great idea, and they are – for some. When considering a wrap fee program, you’ll first need to determine what you’ll actually be paying in wrap fees. Investment advisers and firms like to push sponsored wrap fee programs onto investors with the claim that bundled services make the investment process easier. They offer investors a one-stop-shop for managing investments and wrapped fees means easy payment. However, wrap fees may end up being more costly than a la carte services. Depending on your investment goals and activity a wrap fee program may not be the right choice. If you’re approached by your adviser with a wrap fee program, consider the services you currently use. Make sure you have an understanding of what fees and services are contained in the wrap fee program. All wrap fees offer slightly different services and fees, so understanding what’s in them is essential. Depending on your portfolio and needs, wrap fees may end up costing you more for services you don’t even need.

Here’s a tip:

Wrap fees are typically based of the value of assets. For accounts with frequent trading a wrap fee program can be a great option if it covers transaction fees. However, if you don’t have frequent trade activity and/or your transactions aren’t subject to a fee, a wrap fee program could actually end up costing you more. Of course, this only serves as a general rule-of-thumb. You will need to consider access to all the other services a wrap fee program offers. It is essential that you understand all the services and fees tied to your wrap fee program. Unfortunately, some advisory firms attempt to take advantage of investors by improperly disclosing or falsely advertising costs and services for wrap fee programs. If you want more info on wrap fees and typically wrap fee program services, check out this SEC Investor Bulletin.

It never hurts to seek out investing advice. Even the most experienced investors get investment advice, either from a single investment adviser or a trusted group. The key term here is trusted. If you’re considering opening an investment advisory account, it’s important to choose the right one.

Choosing the Right Investment Adviser

An investment adviser should serve as a trusted sounding board providing investment advice that is most in-line with your investment goals and strategy. As such, it’s important to go over these objectives with your potential adviser; don’t be afraid to ask questions. You should never be intimidated or feel pressured by an adviser or advisory firm. When choosing an investment advisor, be up front about your needs. Here are some common things you should address when considering any investment advisory account:

• Communicate your investment goals:
  • Set investment timelines
  • Discuss limits and risk tolerance
• Set service expectations
• Discuss associated costs and fees

These are just some of the fundamental things you should cover with any potential investment adviser. You should always come prepared with questions of your own that are tailored to your specific investment goals. After you have found an adviser you feel you can trust, make sure you understand your advisory contract. Although an adviser or firm may be the right fit for your investment needs, advisory contracts can be complex; outlining costs and fees for service, communication between you and your adviser and other terms and conditions. Before signing an agreement, make sure you go over any questions you have with your investment adviser. Common things to look for and consider are:

• Level of service
• Fee breakdowns and calculations
• Your responsibilities as an investor
• The responsibilities of your adviser
• How to communicate with your adviser
• Contract cancellation procedures

Investor Resources

These are just some easy tips to help you choose the right investment adviser. For even more helpful advice check out this SEC bulletin.