I'm sure that the title of today's financial procast will cause some of you to wonder if we've just completely lost it. Well, there's certainly an argument for that, however, we just figured that we would agree with all the people out there that actually believe that statement.
It's true…fees are better than commissions.
At least for the people who charge fees it's better.
It turns out that the SEC is sort of going nuts on the whole wrap account situation. But perhaps we should explain what exactly a wrap account is.
That can be easier said than done.
What is a Wrap Account?
Wrap accounts come in a variety of flavors–there are unified managed accounts, managed accounts, mutual fund wrap accounts etc. The basic premise is that you (the investor) have a pot of money and you engage a financial adviser to manage your money and/or accounts. In turn, the adviser will charge you a fee that “wraps” around your entire balance that he/she has control of under the agreement.
The fee will be based on an annual percentage, typically between 1%-3% is what we've seen most commonly. Billing of the fee occurs quarterly in arrears and is usually one-quarter of the annual percentage based on the aggregate account balance on the last day of the quarter. Oh yeah…the fee is deducted from your account(s).
In exchange for that fee, you get financial advice, investment management and trade execution to carry out the strategy that you've agreed upon. Generally speaking, when a person chooses to have their assets in a wrap account, they will incur additional trading costs, brokerage commissions or load fees from mutual funds.
In other words, the whole point behind wrap accounts is that you will avoid paying load fees and commissions. The value added service is that you and your adviser will now have an alignment of values because they are not incentivized to sell you one product versus another to make more money. Now, they are seated on the same side of the table as you and together you can work to plot a strategy that makes sense.
It's a really compelling fairy tale.
Not to say that there aren't many financial advisers who work exactly that way
Does a Wrap Account Make Sense?
The whole concept of a wrap account is wildly unsuitable if you don't plan to have a relatively high instance of trading or transactions that would cause you to otherwise pay a lot of money in trading or transaction costs.
But let's be clear about something here.
All of the reasons that the investment industry gives as to why a person should use a wrap account is a consumer-facing sales pitch at best.
The pitch to advisers (from their firms) as to why they should get more of their clients into wrap accounts is entirely different. We don't want anyone to be under some false pretense that there has been some great meeting of the minds and that all of these firms (and their advisors) have become so altruistic that they've decided making money should take a backseat to providing increased value to their clients.
It seems to us that many people in the financial services industry hold out wrap accounts as the best possible option for someone who wants to save money AND use the services of a financial advisor. We all know that paying commissions is terrible (if you could only see the sarcasm light flashing) so instead you should pay a fee and that's not a commission so that's better.
Now if we ask “Why?” we don't seem to get a lot of really clear answers but there are just a number of people out there who believe that wrap accounts are a superior method because it's cheaper, better or something.
Brantley is a practicing life insurance agent and has been for nearly 18 years. After years of trying to sell like his sales managers wanted him to, he discovered that people want to buy life insurance if you actually explain the benefits.