from the Securities and Exchange Commission
The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors information about investment adviser sponsored wrap fee programs. This bulletin provides basic information about wrap fee programs and some questions to consider asking your investment adviser before choosing to open an account in a wrap fee program.
What is a wrap fee program?
A wrap fee program generally involves an investment account where you are charged a single, bundled, or “wrap” fee for investment advice, brokerage services, administrative expenses, and other fees and expenses. While wrap fee programs may be called different names – such as asset allocation program, asset management program, investment management program, mini-account, uniform managed account, or separately managed account – the defining feature is that they offer bundled investment management and brokerage services for one fee. There is typically a “sponsor” for a wrap fee program, i.e., the person that, for a portion of the fee, sponsors, organizes, or administers the program or selects, or provides advice to clients regarding the selection of, other investment advisers in the program. Some wrap fee programs have more than one sponsor.
In a wrap fee program, your fee is generally based on a percentage of the value of your account, rather than upon transactions in your account. It might be appealing to pay one fee that covers most or all of your investment expenses – but you should be sure you understand what you are actually getting for your money. Because wrap fee programs bundle services into a single fee, total fees to a client in a wrap fee program may be more or less than obtaining such services separately.
| Tip: In general, as an advisory client, a wrap fee based on the value of assets in your investment account may be less if there is a lot of trading activity in your account and the wrap fee covers the costs for executing all or most of the trades. But if there is little or no trading activity in your advisory account or the trades being made would not otherwise have a transaction fee, a wrap fee arrangement may cost more than separately paying for the services. You should check your account statements to review the level of trading, and periodically talk to your adviser about the level of trading in your account, the fees involved, and what sort of account makes sense for you. Of course, there may be considerations other than cost, like access to certain managers, that make a wrap fee program right for you. |
What services and fees does the wrap fee typically cover?
Wrap fee programs can be a convenient way to include all of your investment services in one fee. Wrap fee programs vary, so you should always be sure you understand what services are included – or not included – in the wrap fee.
SEC rules require that a wrap fee program brochure be given to you before or at the time you enter into a wrap fee program contract. The wrap fee program brochure provides you with important information about the program, including information about the services provided and the fees you will pay. SEC rules also require that a firm brochure be given to you for any investment adviser (other than the sponsor) that provides advisory services to you as part of the wrap fee program. The firm brochure includes additional important information, including information about the investment adviser’s services and role in the wrap fee program. Be sure to read the wrap fee program brochure and any firm brochure(s) carefully and to ask questions about anything you do not understand.
You should look for whether the following services and fees are covered by the wrap fee, and consider whether you want or need them to be covered:
- Investment advice. Investment advisory services are an important on-going component of wrap fee programs. They may include financial planning, portfolio management, or advice concerning the selection of other investment advisers.
- Brokerage costs. Brokerage costs are another important component of wrap fee programs. They include trade execution costs – the transaction costs of buying and selling securities. Some broker-dealers may also provide research and/or make recommendations about specific investments. You might pay mark-ups, mark-downs, or spreads in addition to the wrap fee.
- Administrative expenses. Certain administrative expenses are sometimes included in a wrap fee. This could include, for example, custodial fees.
- Other fees and expenses. Other fees and expenses may or may not be covered by the wrap fee. For example, you might pay mutual fund fees and expenses in addition to the wrap fee.
- Third-party service provider costs and trading away. Third-party service providers may provide services to the investment adviser sponsoring the wrap fee program and your account. The wrap fee typically covers these services. In some cases, a provider may offer these services in a manner that may result in an additional cost to you. For example, an investment adviser may select a broker-dealer outside of the wrap fee program to execute certain trades in your account – a practice sometimes referred to as “trading away” – that results in your account incurring separate brokerage fees.
The wrap fee program brochure is required to describe any fees you may pay in addition to the wrap fee and the circumstances under which you might pay such fees.
| Example: Trading Away A wrap fee program charges a single fee that covers investment advisory services from Adviser X and brokerage services from Broker X. Broker X provides most brokerage services to the wrap fee program, and those services are covered by the wrap fee. However Adviser X occasionally selects a different broker-dealer – Broker Y – to provide brokerage services to wrap fee program clients for certain types of transactions. Because services from Broker Y are not covered by the wrap fee, you might be required to pay brokerage fees for Broker Y’s services that are in addition to the wrap fee. |
Questions to consider asking your investment adviser about a wrap fee program:
- What services are included in the wrap fee program? Why does the wrap fee program make sense for me as opposed to another account type? Will my account be actively traded or will the account pursue a buy and hold strategy?
- Who else will be involved in making investment decisions or providing services to my account? Will I have any direct contact with them? Are they affiliated with you or independent?
- How often will you review whether the wrap fee program still makes sense for me? What factors will you assess?
- What fees and expenses are included in the wrap fee? For example, will the wrap fee include all my trade execution costs?
- Other than the wrap fee, what other fees and expenses will I pay? Will these include fees and expenses to other managers/service providers associated with the wrap fee program? What is the likely frequency with which I will incur those fees and expenses?
- How would I change or cancel my wrap fee program contract if I no longer wish to participate in the wrap fee program?
Enforcement Actions
The SEC has brought several enforcement actions for violations of the Investment Advisers Act of 1940 in connection with wrap fee programs.
Two Firms Charged With Compliance Failures in Wrap Fee Programs
SEC Charges Investment Adviser With Failing to Clearly Disclose Additional Costs to Investors
AIG Affiliates Charged With Mutual Fund Shares Conflicts
Additional Information
Details on an investment professional’s background and qualifications, as well as a copy of the wrap fee program brochure, are available on the SEC’s Investment Adviser Public Disclosure (IAPD) website or on the SEC’s website for individual investors, Investor.gov. If you have any questions about how to check the background of an investment professional, you can call the SEC’s toll-free investor assistance line at (800) 732-0330 for help.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.
