Despite Fees, ‘Wrap’ Programs Gaining Fans
A lot of people need help putting together a suitable mix of investments but aren’t willing to pay too much for the assistance. How else can you explain the rising popularity of mutual fund “wrap” programs?
In such programs, professionals draw up an appropriate mix of funds based on each person’s risk tolerance, time frame and other circumstances.
The process includes periodic monitoring of client portfolios, with modifications made to the investment mix when market conditions or personal circumstances change.
The programs are built on an asset-allocation foundation that stresses the importance of mixing and matching different types of stock and bond funds so as to maximize returns for a given level of risk.
Brokerages, banks and even a few no-load fund families offer wrap programs centered around mutual funds, so named because they bundle various services into an arrangement for which there is a single consultation fee. Even brokerage customers pay a fee for the personalized help received, as opposed to a sales charge or commission pegged to each transaction.
But this feature alone doesn’t necessarily make them good deals.
That’s because fees range up to about 1.75% for the portfolio-building advice and assistance--and that’s on top of regular expenses charged by each mutual fund.
The typical stock fund charges nearly 1.5% a year for overhead, management and other outlays. Expenses on bond funds average about 0.9%.
“Adding the two types of fees, the total costs of participating in mutual fund wraps can surpass 3% in some programs,” says Boston research firm Cerulli Associates in a new report.
Even so, the programs are at least reasonably popular, having attracted $12.4 billion as of Dec. 31, according to Cerulli. That’s up from $3.2 billion two years earlier.
The main thrust is coming from full-service brokers, many of whom like the ability to charge smaller but ongoing fees rather than larger, more obvious commissions pegged to each transaction.
Many investors also like the arrangement, as fees seem to represent a good way to link payments made to brokers or financial planners to the quality of services received.
“Strong demand for more service and ongoing contact with a financial adviser is what’s driving this business,” says Vince Acero, president of brokerage SunAmerica Securities in Phoenix.
The TRAK plan offered by brokerage Smith Barney of New York is the largest and oldest of the mutual fund wrap programs, having attracted $3.4 billion since its 1991 debut. Merrill Lynch, Prudential Securities and Linsco/Private Ledger are among the other full-service brokerages with programs counting $500 million or more in assets.
Certain no-load fund families have also gotten into the act--namely Fidelity Investments of Boston, SteinRoe of Chicago and Strong Funds in Milwaukee. Like their brokerage rivals, these firms also tack on a consultation fee, in addition to regular operating expenses on the underlying funds.
Why would no-load outfits want to add an extra layer of fees?
“Our service is designed for investors who want additional guidance and are willing to pay for it,” says Rochelle Lamm Wallach, who heads the Strong Advisor wrap program.
The extra fee at Strong runs up to 1% of an investor’s portfolio balance each year, with discounts for larger accounts. In return, the company manages personalized portfolios of Strong mutual funds on behalf of investors and assigns each client to a specific Strong representative.
The Strong Advisor program caters to people with $100,000 or more to invest. The SteinRoe and Fidelity programs, which work in roughly the same manner but utilize their own funds, require minimums of $50,000 and $100,000, respectively. Fees range as high as 1% at both firms.
Fidelity has attracted $2.4 billion in its Portfolio Advisory Service, and SteinRoe counts $350 million. Strong has only about $50 million in its program, the youngest of the three.
Wrap programs offered by certain full-service brokerages are much more heterogenous. Some examples:
* Smith Barney has established a family of 13 no-commission TRAK portfolios, separate from its other proprietary mutual funds. Each TRAK fund follows a specific investment objective, which makes it easier for clients to know precisely how their assets have been allocated. The program has a low minimum investment of $10,000. The fee ranges as high as 1.5% a year, plus underlying fund expenses.
* In the Mutual-Fund Solutions program offered by Kemper Securities of Chicago, clients can invest in more than 100 mainstream mutual funds, including some offered by no-load groups such as Vanguard, Benham and Invesco.
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In addition, products from load groups such as Putnam, Franklin/Templeton and Kemper itself are available, but investors don’t pay a sales commission on these choices, either. What they do pay is a maximum 1.25% annual fee plus regular fund expenses. The minimum investment is $25,000.
In short, the various wrap programs now on the market provide a way for investors to build a portfolio of mutual funds in a logical manner and without much effort. Measuring one program’s merits against another’s, however, isn’t so easy.
