For $100,000, a Money Manager of One’s Own

Just when you thought you had all the main financial products and services figured out, it’s time to get ready for another. This one is called the “wrap” account, and it combines the services of a stockbroker and a money manager in a way that resembles a mutual fund.

Wrap accounts are so named because investors pay just one fee for the various services they receive. If you qualify, you can look forward to getting a custom portfolio of stocks or bonds run by a professional manager and monitored by your broker.

“It’s appropriate for the person who doesn’t want a mutual fund because, psychologically, he feels he’s just tossed into a big pot with other people,” says Roger Engemann, a Pasadena investment adviser who manages wrap accounts and mutual funds.

How do you qualify for a wrap account? Simply come up with $100,000 to invest--the minimum for most programs. Although that seems excessive, it’s well below the $250,000 to $1 million that top money managers typically require. The reason you can participate for less in a wrap account is that the brokerage finds investors, handles the transactions, safeguards the securities, keeps track of the paperwork and performs other duties, saving the adviser time and money.

Wrap accounts began with E. F. Hutton in 1975, but only in the past three or four years have they really caught on. “I think this is the future of the industry,” says Larry Smith, a broker with Paine Webber in Brea who focuses on wrap business.

Compared to the traditional way of buying and selling stocks, wrap accounts enjoy an ethical advantage because the broker is compensated as a percentage of account size, not the number of trades made. That means both you and the broker benefit if your portfolio appreciates, while both suffer if it loses value. And you don’t have to wonder whether your broker is recommending certain trades simply to pocket a commission. “This removes any potential conflict of interest,” says Len Reinhart, head of Shearson Lehman Bros.’ money manager consulting group in Wilmington, Del.

Compared to mutual funds, which also charge asset-based fees, wrap accounts are rather costly. Typical fees are 3% a year for stock and balanced accounts, and 1.5% to 1.75% for bonds (investors with $500,000 and up often get a discount). By contrast, expenses on a stock mutual fund might run about 1.3% a year, and 1% annually on bond portfolios. “The annual expenses are significantly higher than the expense ratio of mutual funds,” says A. Michael Lipper, head of Lipper Analytical Services in New York.

It’s hard to make a direct comparison, however, because the wrap fee includes all brokerage commissions, while the mutual fund expense ratio doesn’t. On the other hand, most funds face rather modest expenditures for buying and selling stocks, given that they can trade at rock-bottom institutional rates.

Another factor that makes comparisons difficult is that some funds impose sales charges or loads, while wrap accounts don’t.

But more to the point, proponents say, you get better services with a wrap account than a mutual fund. Here’s a rundown on what you can expect to receive in a wrap arrangement:

* Selection assistance. It’s no simple task to find a money manager on your own. Compared to mutual funds, for which performance numbers are widely available, independently verified and standardized money manager investment results are murky. Brokerages fill the void by tracking the performance of hundreds of money managers. “Perhaps the major service in a wrap program is that the brokerage compiles a list of . . . managers,” Engemann says.

Shearson, for example, follows about 1,000 investment advisers, of which it recommends about 125, Reinhart says. Besides performance, Shearson examines subjective factors such as depth of personnel, stock research methods and quality of client communications when evaluating money management firms.

* A personalized portfolio. Although the manager will only buy the stocks that he deems attractive, you may be able to customize your account a bit. For example, you might direct him not to purchase any tobacco or casino stocks. “Many clients impose those kind of restrictions, which you couldn’t do in a mutual fund,” Engemann says.

* Performance monitoring. Your broker will help you keep tabs on your money manager. You will get confirmations whenever a trade takes place, plus monthly or quarterly statements comparing your manager to other advisers or to a benchmark such as the Standard & Poor’s 500. You can change a manager whenever you want, and the manager can dump you if you become troublesome. “Either side can cancel at any time,” Smith says.

* A single fee that compensates the money manager and broker, and covers commissions.

As tempting as a wrap account might sound, there are reasons not to follow this approach. Obviously, the $100,000 minimum is a hurdle, and you might not want to pay a 3% yearly fee.

Perhaps more important, you will probably have to accept less diversification than you could get with a portfolio of mutual funds. A $100,000 wrap account will probably be spread around 20 to 40 stocks, primarily U.S. issues. With the same money, you could buy many different types of mutual funds, covering everything from international stocks to municipal bonds to gold. “The big issue is the level of diversification,” Lipper says.

Critics also wonder how much personal attention someone with $100,000 in a wrap vehicle might receive. If an adviser really likes 20 particular stocks, he will probably place all 20 into each account he manages. “There’s a question in my mind as to whether some wrap accounts are mutual funds in disguise,” Lipper says.

Clearly, wrap accounts aren’t for everyone. But for people who can afford them, they offer an alternative to those popular but impersonal products, mutual funds.

That Personal Touch

Wrap accounts are a relatively new type of investment product which, like mutual funds, offer professional management and diversification. Unlike mutual funds, however, they aim for wealthier investors who desire more personal attention. Here’s how the two types of vehicles compare:

Wrap Accounts Mutual Funds Professional management Yes Yes Diversification Moderate High Account minimum $100,000* $3,000 or less* Sales charge No Maybe (ranges from 0% to 8.5%) Annual fees 3%* 1% to 1.3%* Personalized portfolio Yes No Broker assistance Yes Maybe Client communications Frequent Occasional Terminable upon request Yes Yes

* average