Accounts for Those Who Can’t Do It All
Richard and Barbara Dambeck like to play golf two or three times a week. They also like to travel. What they don’t like to do is spend time tracking their investments. That’s why the Arizona couple recently placed money into a mutual fund “wrap” account.
Wrap accounts occupy a small but fast-growing corner of the investment business. They appeal to people like the Dambecks who want professional advice and assistance, prefer to follow a formal investment plan, appreciate the need to diversify yet don’t want to pay commissions for mutual funds.
Wrap programs that use mutual funds as portfolio building blocks increased their asset totals by 60% last year to $19 billion. While that’s still less than 1% of the overall mutual fund market, the wrap business seems destined to expand, fed by investors who realize they just can’t handle everything by themselves.
“Despite the proliferation of personal finance magazines, daily investment columns and a wealth of investment information available to retail investors, there is a pronounced need for help in assimilating the flood of information,” according to a recent report on wrap funds compiled by Cerulli Associates of Boston and Lipper Analytical Services of Summit, N.J.
Wrap accounts are so named because they bundle, for a single fee, various services. Clients receive help selecting which funds to buy and when to make changes, along with other financial planning advice. Detailed asset allocation assistance is a key ingredient.
The single fee covers all trading of individual funds. Even when load products are used in wrap accounts, investors don’t pay sales charges on them. The lack of commissions is a salient feature of wrap programs.
Most wrap customers receive assistance from a broker or financial planner, perhaps supported by a specialist at the parent firm. But even the handful of no-load fund groups that operate wrap programs, such as Strong Funds of Milwaukee, Stein Roe Mutual Funds of Chicago and Fidelity Investments of Boston, assign an account rep to each customer. Wrap programs thus deliver personal service that do-it-yourself investors don’t enjoy.
“Having them [professionals] watch my account on a daily basis is better than me watching it once a week,” said Richard Dambeck, a retired food-service broker who signed up with Strong Funds. Dambeck said he likes to talk to his rep at least once a month.
Investors typically need $100,000 or so to open an account, although minimums vary. The threshold is just $10,000 at Smith Barney’s TRAK program but $200,000 for Fidelity’s Portfolio Advisory Service. The average customer is 54 years old with a net worth of $225,000, the Cerulli-Lipper report says.
Advisory fees vary widely, by account size and company. Investors might pay as little as 0.25% a year or as much as 2%, with the average at about 1.4%, according to the Cerulli-Lipper report.
Considering that wrap customers also must pay expenses on the underlying mutual funds in which they invest (less any sales charges), costs in some programs can easily exceed 3% annually.
But fees could go lower as more programs debut. Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I., predicts the programs will expand as more people compile six-figure retirement accounts and as baby boomers reach peak investing years.
“Baby boomers are willing to pay for service, but they have been educated by the media that paying a load is stupid,” Bobroff said. “So they want to pay for service over time, not upfront.”
