The wrap account is the hottest concept on Wall Street these days, with $30 billion in assets already and growing fast. If you receive the sales pitch, however, keep in mind that a wrap account isn't cheap and isn't for everyone.
For an annual fee of up to 3 percent of assets for equity accounts and 1.75 percent for fixed-income accounts, a wrap account provides a money manager geared to your investment style. Included are an assessment of your investment goals and risk tolerance, all trading commissions, plus monitoring of your portfolio and manager.
Wrap accounts, which are offered by most of the big brokerage firms, represent one-stop investing once available for only the largest personal accounts. Because of their flat fee, they remove the temptation a broker may have to churn your account to gain commissions. They may also give you an opportunity to benefit from a first-rate manager.
While most still require a hefty $100,000 asset minimum, one of several types of wrap accounts available from Shearson Lehman Brothers has a $25,000 minimum. Prudential Securities likely will offer a lower-asset account by year-end and Merrill Lynch is studying the lower-asset concept. In a similar vein, discount broker Charles Schwab & Co. through its Financial Advisor Service holds accounts run by money managers for investors. However, it simply provides a list of possible money managers to choose from and doesn't screen them.
Big money is involved. The oldest and largest wrap account, Shearson Lehman Brothers' Select program, doubled to $7.5 billion in the past year.
Keep costs in mind.
"Most wrap accounts are coming in at around 3 percent, which is extremely expensive unless you're a very active investor or want high turnover of your account," warned John Markese, director of research for the Chicago-based American Association of Individual Investors.
Three percent is a big cut from your assets. Know the wrap account cost structure and as much as possible about the proposed manager's investment style and track record. Quality of money management and returns received make the difference.
The key is how the wrap accounts pick their managers, how you're matched up with them and how their performance is monitored. Do you ever get to talk with the manager? Do you know whether you're really getting unique advice?
Demand by investors to wrap things up in one package is strong.
"We're seeing strong demand at the $20,000 to $25,000 level, which is different from years ago when $1 million was considered small for this type of account," said Leonard Reinhart, president of SLB Consulting Group, which oversees the wrap account program at Shearson Lehman Brothers. "The investor isn't just paying for high-quality money managers, but for an entire process that includes setting objectives, looking at risk tolerance and selecting appropriate investment vehicles."
As additional lower-asset wrap accounts are offered, determine whether they'll provide the attention you need even though you're not a high roller.
"We're in the research phase of a program that would allow a $25,000 or $50,000 minimum," said Alan Sislen, director of institutional and consulting services for Merrill Lynch & Co. "But whether this comes into being or not, the money managers who are a part of our program will always have unique approaches and styles, which are clearly laid out" before the client picks a manager.
More than 3,000 advisers have worked through Charles Schwab since its Financial Advisor Service began in 1987. One requires a minimum account size of $200,000; others have no minimums. Fees vary as well.
"We provide the investor with a link, a place to start," said Schwab spokesman Thomas Taggart. "But they must ask the hard questions."