Brokerage wrap accounts explained

Get broker services without the risk of “churning”.

Brokerage wrap accounts are a great way to get the services of professional money managers without worrying about a few of the worst disadvantages. Many people find that professional money managers or full-service brokers will mismanage money in order to turn a higher profit. However, wrap accounts have a few features in place that make this sort of mismanagement less likely.

In a wrap account, you will first pay an annual fee in order to use the brokerage wrap. This amount can vary from broker to broker, so you should make sure that you check to see which annual percentage will apply to you. After this, your broker will split up your investment amount into several different mutual funds or money managers. You will only have to pay the single annual fee – there aren’t any extra fees, no matter how many different money managers end up working with your funds.

The most common problem that people run into with money managers is that if they are working on commission, it is best for the manager to make a lot of money through different transactions. Since each time your money is sold or purchased back counts as a transaction, some managers and brokers have found it worthwhile to “churn” accounts. This means that the same transaction is carried out thousands of times in one day. This does not help your account (and in some cases, it can even harm the amount of money that you have left over) but it does generate commissions for large volumes of transactions.

The brokerage wrap accounts prevent this because your broker is no longer working on commission – they are not going to get extra money for the number of transactions that take place. Since the payments are based on percentages, it is in your broker’s best interest to make sure that your investment has a decent return.

There is one thing that a brokerage wrap account cannot help. If you do not have a particularly good broker, it is always possible that they could make bad decisions with your money. You can prevent this problem by researching your broker prior to signing any contracts – and it is likely that your broker will be able to make better decisions than you would, anyway.