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    “That’s a wrap Mr. DeMille” Wrap Accounts – a Q and A

    With apologies to Cecil, what is a “wrap”?  That depends on your perspective – there are two main versions of wrap accounts – traditional and mutual fund.  A traditional wrap account offers several different types of investments to help meet the needs of the individual investor. Their main attraction is they offer investors access to multiple fund families and multiple managers.  A mutual fund wrap account is a basket of mutual funds normally only from one company.

Traditional wraps allow small investors to access professional portfolio managers, which were once only available to large institutional investors and the extremely wealthy.  Traditional wraps typically require an initial investment of at least $25,000.   Mutual fund wraps generally have smaller investment minimums, sometimes as low as $2,500. 

A wrap account is a form of managed money that combines — or wraps — commissions and management costs into one fee based on the value of the assets within the plan.  Unlike mutual funds, this fee is paid from the assets as a separate expense and may therefore become tax-deductible by the investor.  While these managed accounts sound a lot like mutual funds, they offer greater customization and may require higher minimum investment levels.  Typical wrap fees range from 1% to 3.5% and are calculated annually and paid quarterly.

    Some mutual fund companies have programs in which they select portfolios of mutual funds wrapped together into a customized portfolio.  They are readily accessible but they can be expensive, as they tend to tack on an extra fee of anywhere from .75% to 1.75% on to the existing MERs of the funds.  These additional fees cover such items as more extensive reporting and automatic rebalancing plus general supervision of the managers.

    Other companies offer unique pools of investments instead of mutual funds.  These pools are normally run by well-known portfolio managers and also promote the benefits of re-balancing, research, consulting, monitoring of the performance of the selected managers, reporting and other custodial services.

    ETFs – Exchange Traded Funds – are not wrap accounts by themselves but some dealers are offering ETFs that are grouped according to general risk profiles.  Rebalancing and enhanced reporting may also be available for these specialized accounts.  They are generally only available through full-service brokerage houses and their investment advisors – not mutual fund representatives.

    The mutual fund industry is enormous, and constantly growing.  With so many funds from which to choose, selection can be a major challenge!  Building and monitoring your portfolio can be a bit overwhelming for some and for those people a wrap account may be an attractive alternative.  Just remember to make sure you understand the costs involved and satisfy yourself about the value of the dollars you are spending. 

Courtesy to Jim Yih for some of his comments – www.jimyih.com and Investopedia – www.investopedia.com

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