With influx of 'wrap' programs, investors should find out what's being offered

MUTUAL FUNDS

July 31, 1994|By New York Times News Service

What's the best way to describe a mutual fund industry with nearly 5,000 funds: "diverse" or "confusing"?

The industry prefers diverse, but clearly more investors are perplexed. That explains the astonishing growth in programs known broadly as "wrap" accounts, in which brokerage firms, banks and mutual fund companies assemble packages of funds for investors to meet their financial goals.

The trend is likely to accelerate. "We expect the strong growth in mutual fund industry wrap accounts to continue over the next few years," analysts wrote in a recent report from Cerulli Associates Inc. in Boston, a company that specializes in consulting to the financial services industry.

Wrap accounts, which provide advisory, reporting, investment and other services for a single fee, now total $114.5 billion, Cerulli estimates.

But the pattern of growth is changing. Conventional wrap accounts -- with $100,000 minimum investments, 2.5 percent to 3 percent annual fees and multiple investment managers -- grew 36 percent in the year that ended March 31, and remain by far the biggest chunk of the business, at $106.8 billion.

But the so-called mutual fund wraps -- with $25,000 minimums, fees equal to 1 percent or 1.5 percent and managed by name-brand fund companies -- grew an eye-popping 136 percent, to $7.7 billion, Cerulli said.

In conventional wraps, the fee covers asset-allocation advice and performance reports, as well as transaction, custodial and similar expenses. In mutual fund wraps, transaction, custodial and administration expenses are passed on by the funds.

That's why the term "wrap account" is somewhat of a misnomer. In fact, some are simply known as asset-allocation programs, like Fidelity Investments' Portfolio Advisory Service or Stein Roe Mutual Fund's Counselor program.

Whatever the name, the mutual fund wrap accounts mostly offer advisory services. You talk to someone who helps you analyze your investment needs, develop an asset-allocation strategy and put together a package of funds. Besides issuing reports, the advisers will help you make changes to the portfolio as your financial needs change.

As the trend speeds up, a growing number of programs -- among them Raymond James & Associates, Calvert Securities and Linsco/Private Ledger -- are bundling no-load funds.

Kemper Securities will offer at least 15 no-load fund groups as well as its own funds in its new Mutual Fund Solutions program, which will levy fees from 0.75 percent to 1 percent, with no added sales charges.

One of the biggest players today is Linsco, which is based in Boston and provides support services for a network of independent financial advisers. Through its Strategic Asset Management program, advisers can choose from more than 800 no-load mutual funds sponsored by companies that include Fidelity, Vanguard, T. Rowe Price, Scudder, 20th Century and Neuberger & Berman.

Several load funds are also available without the sales charges, but the company refuses to name them.

Fees for the program are negotiated separately with the advisers but average roughly 2 percent a year for accounts worth $25,000. That drops to 1.75 percent for $100,000 accounts and 1.5 percent for $250,000 accounts, said James S. Putnam, managing director for national sales.

The company provides its representatives with five model portfolios geared toward income, growth and so on, but "they are adjusted based on a particular client's needs," Mr. Putnam said.

And in Linsco's case, and in most others, the "investment advisers" are full-service brokers who can also sell you stocks, bonds, annuities or load mutual funds.

How do these programs differ from paying a financial adviser a flat fee of 1 percent or so to allocate and monitor your money in no-load funds? Not much.

In fact, "mutual fund wrap programs are in direct competition with individual investment advisers, who typically trade no-load funds through the Charles Schwab or Fidelity no-transaction-fee programs," said Mary McAvity, a consultant with Cerulli.

Costs may be higher, so this should be checked on a program-by-program basis. Independent advisers charge an average of 1.5 percent a year, according to one analyst.

Find out what the fee covers. Merrill Lynch charges only 0.75 percent for its Mutual Fund Advisors program, but investors have to pay sales charges on the underlying funds as well.

While advisers can choose from the entire universe of funds, wrap programs may offer only a limited selection. Before joining, find out how many funds are offered, and which ones.

Whether you work with an independent adviser or a program, make sure the person you work with is competent.

Cerulli noted that many of the "advisers" in mutual fund wrap programs "are brokers who have very little asset management ** experience."

Ask for Form ADV, Part II, which all advisers must file with the Securities and Exchange Commission. That will show the adviser's background, investment philosophy, charges and other information.

Finally, consider how customized the program will be: a choice ++ of several model portfolios, or truly individualized.

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