No-Load Funds Plus Advice? That’s a ‘Wrap’

Not long ago, it would have been unthinkable for someone to walk into a full-service brokerage and buy a no-load Janus, Scudder or Strong mutual fund. Yet it’s happening today as the fund-supermarket idea expands beyond the realm of discounters.

The so-called wrap-account programs offered by most major full-service brokerages are not quite the same as the supermarket plans available from discounters. With the full-service firms, you will pay a higher cost for the privilege, but you will also receive professional advice and some hand-holding too.

Full-service firms often charge an annual advisory fee equal to perhaps 1% to 1.5% of your account balance. In return, a broker works with you to help you determine your risk tolerance, investment objectives and other account variables, including a suitable asset-allocation mix. Then he or she recommends an appropriate portfolio of funds, perhaps including traditional load products for which the sales charge has been waived. The advisor will then monitor the situation, recommending switches when necessary.

Fees, account minimums and other details vary. The Pruchoice plan offered by Prudential Securities, for instance, is open to investors with as little as $10,000 in individual retirement accounts or $25,000 otherwise. The annual advisory fee is charged on a sliding scale that ranges up to 1.25%.

A more comprehensive Merrill Lynch account also allows access to other types of investments, and requires at least $100,000 in portfolio assets.

Assuming you need investment help, are these fund wrap accounts worth it?

In deciding, keep in mind that the programs aren’t that cheap when you consider that the expense ratios for funds you buy might average at least another 1% a year, raising your total costs to perhaps 2.5% or so. For that reason, some wealthy investors might prefer to buy their portfolios of stocks directly and make their own buy-and-sell decisions. A “wrap” arrangement may be less expensive than buying load funds, though, especially if you jump among investments fairly often.

One selling point is that both client and broker have a vested interest in working together, since each party benefits if the portfolio appreciates. The fee arrangement thus appeals to investors “who believe that an alternative to commissions will align their interests most closely with those of their financial consultant,” as Merrill Lynch puts it.