How Does a Wrap Account Work?

A wrap account is a certain type of brokerage account in which the broker manages your investment portfolio for a flat fee, usually charged annually or quarterly. There are no additional commissions per trade, or additional administrative fees. The flat fee covers all the costs of administering and managing the account. In exchange for the flat fee – usually determined at 2 or 3 percent of the value of your assets per year – you get all the brokerage and investment services you otherwise would on the account.

Wrap accounts are a popular choice among high end investors. This may be because many investors would prefer to pay a single, predetermined charge than a seemingly endless procession of commissions and fees. Another great advantage of a wrap account is that it protects the investor from what is called “churn,” or over trading. When brokers repeatedly make trades to earn more commissions, that is called “churn.” With a wrap account, you are protected from excessive trading because the broker only has incentive to make a trade when it is advantageous for your account. Since the overall annual fee is often based on the assets in your account, when you make money, the brokerage makes money.

Wrap accounts are generally reserved for investors who can afford to maintain a high balance in their brokerage accounts. A traditional wrap account generally requires a large initial investment: at least $50,000 to $100,000, typically. When you open a wrap account, the brokerage is obliged to make certain disclosures to you, including:

  • The amount of the flat fee charged for your wrap account,
  • Whether the fee is at all negotiable,
  • What types of portfolio management services you can expect under the wrap account program, and
  • A legal statement that discloses that the program could cost you more than it would if you decided to purchase the brokerage’s services on a commission basis.