Legal Definitions - wrap-fee account

A wrap-fee account is a type of investment account where a client pays a single, all-inclusive fee for a bundle of services. This fee, typically calculated as a percentage of the total assets managed in the account, covers various costs that would normally be billed separately. These often include investment advisory services, brokerage commissions for buying and selling securities, and administrative expenses. The primary purpose of a wrap-fee account is to simplify billing and provide transparency, as clients know upfront what they are paying for a comprehensive suite of investment management services.

Here are some examples to illustrate how a wrap-fee account works:

• Example 1: Individual Retirement Planning

  Maria, a busy marketing executive nearing retirement, decides to consolidate her various investment accounts into a single, professionally managed portfolio. She opens a wrap-fee account with a financial advisory firm. Instead of receiving separate bills for each stock trade, for her advisor's time, and for account maintenance, she pays a single annual fee of 1.25% of her total assets in the account. This fee covers all the brokerage commissions for buying and selling securities, the ongoing investment advice from her financial planner, and all administrative costs associated with managing her retirement funds. This arrangement simplifies her financial oversight and provides a predictable cost for comprehensive investment management.

• Example 2: Family Wealth Management

  The Chen family has inherited a significant sum and wants a professional firm to manage their wealth for long-term growth and preservation. They choose a wealth management firm that offers wrap-fee accounts. The firm charges a flat 1% annual fee based on the total value of the family's portfolio. This single fee covers all aspects of their investment management, including detailed financial planning, portfolio rebalancing, all transaction costs for buying and selling investments, and regular performance reviews. This allows the Chen family to understand their total cost of wealth management without having to track numerous individual charges.

• Example 3: Small Business Investment

  David owns a successful small manufacturing business and wants to invest the company's surplus cash for future expansion. He opens a corporate investment account structured as a wrap-fee account with a financial institution. The institution charges a fixed percentage, for instance, 0.8% per year, based on the account's value. This fee encompasses all the trading commissions incurred when the portfolio manager adjusts the company's holdings, the advisory fees for strategic investment guidance tailored to the business's goals, and the administrative costs associated with maintaining the corporate account. This simplifies the accounting and financial management for David's business, as all investment-related costs are consolidated into one clear charge.