Key Takeaways
- A mutual fund wrap, or wrap account, gives investors access to a selection of mutual funds with personalized financial advice for one annual fee.
- These accounts are offered by full-service brokerages and help investors to build customized portfolios based on individual preferences.
- Wrap fees typically range from 0.25% to 3% and are tiered based on the assets managed within the wrap account.
- High-net-worth individuals are the primary target for mutual fund wraps due to the $25,000 minimum investment.
- Robo advisors provide an automated, cost-effective alternative with lower minimum investments often using ETFs instead of mutual funds.
What Is a Mutual Fund Wrap?
A mutual fund wrap, also known as a mutual fund advisory program or a wrap account, is a wealth management service that gives investors access to personalized advice and a large pool of mutual funds. Mutual fund wrap programs are often offered by full-service brokerage firms.
The investor typically chooses from a list of mutual funds usually offered with discounted sales loads. The investor pays an annual fee for the account overall, known as the wrap fee, that covers advisory services and trading costs. A minimum investment is typically required.
Find out how mutual fund wraps work, their benefits, costs, and how they compare to alternative options like robo advisors.
How a Mutual Fund Wrap Works
Mutual fund wrap programs can be a good option for high-net-worth clients seeking to build a customized portfolio of mutual funds. Mutual fund wrap programs allow investors to build a portfolio of mutual funds based on their preferences and objectives. Mutual fund wrap accounts typically require a minimum investment of $25,000.
In a mutual fund wrap program, investors can work with a financial advisor and will be given a select list of funds. A financial advisor can work with the client to build a portfolio based on the goals and risk tolerance of the client. Financial advisors will typically suggest mutual fund portfolio allocations based on the client’s investment profile.
Investors in mutual fund wrap programs can benefit from lower trading costs and a professionally advised portfolio based on their personalized investment goals. The annual wrap fee is typically the primary expense associated with the portfolio. The annual wrap fee is usually tiered based on assets in the program. It can range from 0.25% to 3% depending on the program and is in addition to annual operating fees charged by the funds in the portfolio.
Important
With mutual fund wraps, the investor works with an advisor to create a portfolio. With robo advisory services, the process is automated.
The Competitive Landscape of Mutual Fund Wraps
Mutual fund wrap programs can be a good investment option for investors. However, the increasing presence of robo advisors has created competition for these programs. As a result, many full-service brokerage firms offer robo advice alternatives to their customers. Charles Schwab’s Intelligent Portfolios is one example.
Robo advice platforms provide investment profiling and portfolio building services. They offer some additional benefits in that the service is automated, fees can be lower, and investment minimums are usually lower. With the lower minimum investments, robo advice wrap programs can be offered to investors seeking to build managed portfolios with only $5,000. Most robo advice wrap programs use exchange-traded funds (ETFs) rather than mutual funds.
Fast Fact
Robo advisory programs typically offer ETFs rather than the mutual funds. They can be accessed by investors with only a $5,000 minimum versus the $25,000 minimum typical of wraps.
Investing Through Mutual Fund Wrap Programs
Investors will find mutual fund wrap programs at most full-service brokerage firms. UBS and Charles Schwab are two examples. These programs allow investors to build portfolios of no-load mutual funds with just a small annual fee added for the portfolio management support from professionals.