Wrap Fee
What it is
A wrap fee is a single, all-inclusive charge an investment manager or advisor levies for managing an account. It typically covers advisory services, portfolio management, trade execution, and administrative costs. The fee is calculated as a percentage of assets under management (AUM), commonly ranging from about 1% to 3% per year.
How it works
- The advisor charges a flat percentage of the account balance instead of billing separately for each trade, commission, or advisory service.
- Fees are usually billed pro rata (monthly or quarterly) based on the account’s market value.
- Each firm defines its own wrap-fee program; what’s included and excluded varies by provider.
What the fee commonly covers
- Investment advice and portfolio management
- Trade execution and brokerage commissions
- Research and investment recommendations
- Account administration and reporting
What may be excluded
- Underlying mutual fund expense ratios and certain third‑party product fees
- Custodial or platform fees from outside providers
- Uncommon brokerage charges or special service fees
Firms are required to provide a written wrap-fee brochure that specifies exactly what is included and what additional costs a client might still incur.
Who benefits
- Investors who actively use a broad range of advisory services and expect frequent trading or rebalancing.
- Clients who value predictable, bundled pricing and want to avoid per‑trade incentives that can encourage excessive trading.
Who may not benefit
- Passive, buy-and-hold investors who rarely change their portfolios; they may pay more than the sum of occasional transaction fees.
- Investors with small account balances, where a 1%–3% annual fee can substantially reduce net returns.
- Those whose assets are primarily low‑cost ETFs or index funds, because the added advisory cost may not deliver proportionate value.
Advantages
- Predictable, consolidated pricing for most investment-related services
- Eliminates per‑trade incentives that can lead to excessive turnover
- Simplifies billing and cost comparison among advisors
Disadvantages
- Potential to pay for services you do not use
- Fee levels (1%–3%) can materially reduce returns, especially for conservative portfolios or small accounts
- Additional underlying fees (e.g., mutual fund expense ratios) can still apply
Regulatory and disclosure notes
- Wrap-fee programs may be called asset management programs, separately managed accounts, or other names, but the concept is the same.
- U.S. regulations require advisors to deliver a wrap-fee brochure that describes services covered, fees charged, and any additional costs or conflicts of interest.
- Prospective clients should read the brochure carefully to understand the program’s scope.
Questions to ask before choosing a wrap-fee program
- Exactly which services are included and which are excluded?
- Are underlying product expenses (mutual funds, ETFs) covered or passed through?
- How is the fee calculated and how often is it billed?
- Is there an account minimum or tiered fee schedule?
- Are there performance-based fees or incentives that create conflicts of interest?
- What are the termination or transfer fees, if any?
- Can you compare the total expected wrap fee to a pay‑as‑you‑go (per‑trade or per‑service) cost estimate?
Key takeaways
- A wrap fee bundles advisory, trading, and administrative costs into a single percentage of AUM, usually 1%–3% annually.
- It provides predictable pricing and removes per‑trade incentives, but may be costly for passive investors or small accounts.
- Always review the advisor’s wrap-fee brochure to confirm what’s included and to identify any additional fees before enrolling.