The Advisor Review

Lower Fees, More Choice

Once only for the wealthy, managed accounts have fallen dramatically in cost while at the same time, additional features have been added. The average annual fee for a "wrap or managed" account has fallen to 2% of account value.

Managed accounts offer the most equitable fee structure available in the marketplace today. No longer are brokers criticized for selling product for commission. Rather the client, manager and broker all have the same objectives - maximize investment returns, while limiting downside risk.

Wrap accounts charge an annual fee on a clients' account regardless of how often the funds or stocks within the account are bought or sold. The thought is that by removing the firm's vested interest in commission based products, managers will retain more objectivity and flexibility in structuring and moving client investments.

Fees generally range from 1% to 3% on account value. Equity accounts range from 1% to 3%, while fixed income accounts range from 1.25% to 1.75%. Charges are usually based on a sliding scale similar to mutual funds' break point pricing. Larger accounts have lower percentage fees. In some instances, brokers may choose to discount their fees up to 30% when in a competitive situation or for their best clients.

Brokers typically share evenly in wrap fees collected by wrap account managers. A common arrangement has the client paying a 2% wrap fee to the manager with a 1% re-allowance to the broker on record.

Until recently, mutual fund wrap programs have been the vehicle of choice for most wrap managers. Unfortunately, high trading costs and negative tax effects (capital gains and losses when trading between funds) have lessened their appeal.

A new and promising investment vehicle has been introduced recently, called a "variable annuity wrap", in which your money is allocated to various brand-name mutual funds within a tax-deferred wrapper. Eliminating the negative tax effects and high trading costs associated with mutual fund wrap programs. At first, these programs were far from ideal; most forcing you to invest your clients' money in the provider's proprietary funds with limited downside protection and high expenses.

Within the last few years, though, variable annuity wrap programs have been expanded to include well known outside fund managers, multiple income and withdrawal options and expanded downside protection options. Security Benefit Group, for example, provides access to more than 45 funds in 8 different fund families with 17 different rider features. "The most flexible contract in the industry".

Tax Efficiencies and Downside Protection

In addition to choice and lower fees, wrap programs also provide tax efficiencies not available outside managed accounts. Tax savings are realized in several ways including the elimination of realized gains and losses resulting from active trading between funds and the deferral of income taxes on investment income until funds are distributed.

Most wrap programs profile an investors' risk-reward tolerance. This profile allows managers to build and customize a model portfolio for your clients. Managers consider many factors when modeling a clients' portfolio, including evaluating a clients' investment objectives, risk, and cash flow constraints.

Model portfolios are based on risk-reward optimization models. Projections are based in part on historical returns and risk is measured by standard deviation - the amount by which monthly portfolio returns move about their average.

An additional layer of downside protection is achieved by choosing an annuity as the underlying investment vehicle for your clients' managed account. Annuities have a unique characteristic not found in any other investment vehicle - they guarantee principle or accumulated principle (your clients' premium accumulated at a fixed interest rate of 5%) when your clients' need it most - at retirement or death.

Growing your fee based business

In today's investment environment, it's more important than ever before to bring "value added" to your clients. Aligning your goals as a broker with your clients' needs is a healthy and equitable business model. Explaining this win-win dynamic to your client will build stronger relationships and garner trust as your practice grows.

Using third party managers can provide you and your clients with "peace of mind" and professional money management.

Moving to a fee based business will allow you to focus on what you do best - growing your business and building relationships. Wrap accounts provide your clients with the expertise and diversification they need to achieve their financial goals.