Wrap fees are the schedule of bundled rates that are charged to an investor. Instead of charging a separate fee for each service that is extended to the client, a brokerage or other type of financial service will provide the investor with a blanket charge for all services that are included in the individual investment program. Essentially, a wrap fee keeps the charges simple for both the investor and the service provider.
The exact amount of the wrap fee will depend on the range of services included in the structure of the individual service package. Some financial institutions, such as banks, research firms, investment advisory services, and financial management programs, will offer a series of investment programs that a client may choose to engage. A basic program will include a limited number of services, while each succeeding package will include more services and have a slightly higher fee associated with the program.
This inclusion of multiple services for one flat fee is often an excellent choice for an investor who needs competent management and counsel on his or her investments, and prefers to manage all assets through a common agency. Generally, the wrap fee will take into consideration such factors as broker commissions, the annual maintenance charges associated with the various accounts held by the investor, and research fees. Some firms request that investors remain with one wrap fee package per calendar year, but will allow a change at the beginning of the next year.
One area where wrap fee programs vary is how the investor goes about paying the wrap fee. In some cases, the charges may be deducted directly from one of the funds managed under the program. Other programs allow the investor to pay the wrap fee outside the investments managed under the program.
There are some advantages to paying the wrap fee outside the investments covered under the investment program. In some instances, such as with an IRA, the total fee is treated as a contribution to the IRA if the charge is deducted from the balance. However, if the wrap fee is paid from resources independent of the IRA, the wrap fee might be eligible to be claimed as a tax-deductible expense.
