Definition of a Wrap Fee

A wrap fee is a single, all-inclusive fee that covers investment management services, brokerage commissions, trading costs, and administrative expenses. Instead of charging per transaction, investment firms apply this fee as a percentage of assets under management.

Wrap fees are commonly associated with wrap accounts, where investors receive a comprehensive investment service for a fixed annual fee. This structure simplifies cost management and eliminates per-trade commission fees.

For example, a Canadian investor with a wrap account valued at 500,000 dollars may pay a wrap fee of 1.5 percent per year, which amounts to 7,500 dollars and covers all advisory and trading costs.

Purpose of a Wrap Fee in Investment Management

Wrap fees provide several advantages in wealth management and investment advisory services:

• Cost Transparency – Investors pay a fixed fee rather than unpredictable transaction costs.
• Comprehensive Management – Covers investment selection, rebalancing, and reporting.
• Predictable Expenses – Clients can budget for investment costs without worrying about hidden fees.
• Encourages Long-Term Investing – Since fees are not tied to trading volume, advisors are incentivized to focus on long-term strategies rather than frequent trades.

Types of Wrap Accounts

Mutual Fund Wrap Accounts

• Invest primarily in mutual funds selected by an advisor.
• Suitable for investors seeking diversification with professional management.
• Fees typically range between 1 percent and 2 percent of assets under management.

Separately Managed Accounts (SMAs)

• Custom-built portfolios managed by investment professionals.
• Allows for tax-efficient strategies and individual security selection.
• Best suited for high-net-worth investors.

Exchange-Traded Fund (ETF) Wrap Accounts

• Uses low-cost ETFs to build a diversified portfolio.
• Ideal for cost-conscious investors seeking passive investment strategies.
• Fees typically range between 0.5 percent and 1 percent.

Hybrid Wrap Accounts

• Combines actively managed funds, ETFs, and individual securities.
• Provides flexibility for investors wanting both active and passive management strategies.

Advantages and Disadvantages of Wrap Fees

Advantages

• Simplified cost structure with a single fee covering all investment-related expenses.
• Encourages long-term strategies by removing incentives for excessive trading.
• Provides professional wealth management, including investment selection and rebalancing.

Disadvantages

• Higher costs for passive investors who trade infrequently.
• Some underlying funds may have additional expense ratios.
• Investors with smaller accounts may find traditional fee models more cost-effective.

Related Terms

• Assets Under Management (AUM) – The total value of assets managed by an investment firm.
• Expense Ratio – The annual percentage cost of managing a mutual fund or ETF.
• Financial Advisor Fees – Charges paid for professional investment management services.

Interesting Fact

In Canada, high-net-worth investors increasingly use wrap accounts, as many wealth management firms offer customized fee structures for large portfolios.

Statistic

According to Investor Economics, over 30 percent of managed investment assets in Canada are held in wrap accounts, showing their appeal to investors seeking simplified fee structures.

Frequently Asked Questions (FAQ)

1. How are wrap fees calculated?

Wrap fees are typically charged as a percentage of assets under management, usually ranging between 0.5 percent and 2 percent annually.

2. Who benefits most from wrap fees?

Investors with large portfolios and frequent trading activity benefit the most, as they avoid per-transaction costs.

3. Are wrap fees tax-deductible in Canada?

Wrap fees may be tax-deductible if they relate to investment advice for taxable accounts but are not deductible for RRSPs or TFSAs.

4. Do wrap accounts have additional costs?

While wrap fees cover management and trading costs, investors may still pay fund expense ratios if mutual funds or ETFs are included in the account.

5. Can I negotiate wrap fees?

Many financial advisors offer lower fees for larger portfolios, often reducing rates for accounts over one million dollars.