A wrap fee bundles investment advice, trading and account costs into one yearly percentage of your account. À la carte (unbundled) pricing charges for advice separately and lets trading and account costs fall where they fall. For a portfolio of index funds or ETFs that rarely trades, à la carte usually costs less: since Schwab, TD Ameritrade and E*Trade cut online stock and ETF commissions to zero in October 2019, much of what a wrap fee bundles may already be free at your brokerage. A wrap can still cost less if your account trades often in securities that carry a charge.
The two side by side
| Wrap fee | À la carte | |
|---|---|---|
| What the one fee covers | Advice, plus trading, and often custody and the outside managers’ fees | Advice only |
| Trading costs | Inside the wrap fee | Billed by the brokerage; often $0 for online US stock and ETF trades |
| Still extra | Fund expenses, mark-ups and spreads, trade-away commissions | Fund expenses, plus any commissions and account fees |
| Headline rate | Higher than a typical advisory fee, by design | The advisory fee alone: a median 1% of assets at fee-only firms, or a flat or hourly price |
| Pull on the firm | Trading costs come out of the firm’s share, so a reason to trade less, sometimes too little | No pull from trading when trades cost nothing |
| Disclosure document | A wrap fee program brochure | The firm’s Form ADV Part 2A brochure |
Wrap programs don’t always use the word. The SEC notes they go by names such as asset allocation programs, asset management programs, investment management programs, uniform managed accounts and separately managed accounts.
What the bundle used to buy
A wrap fee made sense when trades were expensive. If your advisor rebalanced often and each trade carried a commission, paying one fee that covered every trade could cost less than paying ticket by ticket, and it removed any reason for the advisor to trade more to generate commissions.
That math changed in 2019. On October 1, Charles Schwab said it would cut online commissions for US stocks, ETFs and options (apart from a per-contract options charge) from $4.95 to zero from October 7, and that the same pricing would apply to clients of independent advisers trading at Schwab. TD Ameritrade and E*Trade announced the same within a day. For a portfolio of stocks and ETFs at a large brokerage, the trading a wrap fee covers may now cost nothing à la carte.
What each costs
The SEC’s rules make the trade-off explicit. A wrap fee program brochure has to explain that the program may cost you more or less than buying the services separately, and describe what decides it: what the services would cost on their own and how much your account trades. The SEC also encourages advisers to say in their Form CRS that wrap fees include most trading and custody costs and therefore are higher than a typical asset-based advisory fee.
So the question is the size of the premium, the gap between the wrap rate and the advisory fee you’d pay on its own, against the trading costs you’d avoid. Wrap rates aren’t published in a way we can compare across firms, so here’s what a premium costs in dollars on a $500,000 account, at a few example sizes.
If your account would cost little or nothing to trade à la carte, every dollar of premium is cost without a matching saving. The premium also grows with your balance, while trading costs mostly don’t. To find your own number, ask the firm for the wrap rate and for what it would charge for advice alone, then ask your brokerage what last year’s trades would have cost.
What a wrap fee doesn’t cover
A wrap brochure has to describe fees you may pay on top of the wrap fee, including mutual fund expenses and mark-ups, mark-downs or spreads paid to market makers. Two more are worth asking about:
- Trade-away costs. A manager in a wrap program may place trades through a different broker than the program’s. The commission on those trades can be charged to you on top of the wrap fee.
- Fund costs inside the portfolio. The expense ratio of every fund you hold is paid either way. It’s not part of the wrap.
In a 2021 risk alert drawn from more than 100 examinations, SEC staff found brochures that didn’t fully disclose fees outside the wrap, such as bond mark-ups and trade-away fees. They raised concerns that clients in accounts with little trading were paying higher total fees and costs than they would outside a wrap. And they found firms that hadn’t told clients that accounts with low trading, high cash balances or a lot of bonds might get similar services for less outside a wrap program.
When a wrap fee is the better choice
- Your account trades often in things that still carry a charge, such as some mutual funds or options at your brokerage, and the wrap covers those costs.
- You want access to outside managers that a firm only offers through its wrap program, such as separately managed accounts.
- You value one predictable number and have checked that the premium is small.
When à la carte is the better choice
- Your portfolio is index funds or ETFs at a brokerage that charges nothing to trade them.
- Your account rarely trades, holds a lot of cash, or is mostly bonds. Those are the accounts SEC staff said might get similar services for less outside a wrap.
- Your balance is large. A premium charged as a percentage grows every year with your account.
- You want to see each cost. Unbundled pricing shows what you pay for advice and what you pay for everything else.
How to check what you’re paying
- Read the “What fees will I pay?” section of the firm’s Form CRS. An adviser has to describe any wrap fee program fees there.
- Ask for the wrap fee program brochure, and read Item 4: the fee, what’s included, what’s extra, and whether the person recommending the program earns more when you join it. The brochure has to disclose that.
- Ask: “What would you charge for advice alone, without the wrap?”
- Ask: “Do any of my managers trade away from your broker, and who pays those commissions?”
- Ask: “Do you or your firm earn anything other than what I pay you?”
Every registered firm’s documents are free on the SEC’s adviser search. A fee-only advisor can run a wrap program and still be fee-only, so the label doesn’t settle this; the line items do. For the options with no bundle at all, compare a flat fee with a percentage of assets, read the glossary entries for an AUM fee and Form ADV, or see whether 1% is too much. Then browse flat-fee advisors or advisors for retirees in the public graph.