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What is a wrap account?

Wrap accounts come in many shapes and sizes. Just as the word implies, they offer the convenience of a bundle of investments and services wrapped up in a managed product under one fee. The opposite of do-it-yourself investing, these accounts appeal to investors who prefer to leave the challenges of investing to professional money managers or don't have the time to manage their own account. Clients pay a brokerage firm or mutual fund company an annual fee to manage the portfolio rather than pay commissions each time securities are bought or sold.

Wrap accounts have become more popular in the last few years and are offered by banks, investment firms and mutual fund companies. A wrap account, a common industry term, is described in a variety of ways depending on where you obtain investment advice or purchase financial products.

Characteristics of Wrap Accounts

There are essentially two types: a traditional wrap account offered by brokerage houses consists of a full range of investments while a mutual fund wrap account, as you might guess, is made up of only mutual funds.

Wrap accounts through a brokerage firm usually offer investors the expertise of outside money managers who specialize in different areas of investing such as bonds or equities. A broker will suggest a money manager who will invest in securities that fit in with your investment goals and risk tolerance. As the wrap name infers, an account can blend the services of both stock and bond managers within the same account for further diversification of holdings. You also have the combined services of a broker along with the money manager monitoring your account.

Both traditional wrap accounts and mutual fund wrap accounts offer the following services



includes transaction costs

quarterly performance monitoring

While traditional full-service wrap accounts allocate your holdings among a variety of money managers with different investment styles, most mutual fund wrap accounts are based on a computer model of mutual funds and, therefore are not as customized to the individual investor.

Common features of wrap accounts

A professional advisor will interview you to find out about your investment personality, risk tolerance and financial goals.

Based on your needs and risk tolerance, the advisor may use a software program to choose a mix of investments or asset allocation among stocks, bonds and cash, or, in the case of mutual fund wrap accounts, an appropriate mix of mutual funds to fit your needs

Client reporting and administrative services included in the annual fee

Minimum Investment and Costs

Traditional wrap accounts offered by brokerage firms usually require a minimum investment of between $100,000 to $200,000. Most mutual fund companies offer wrap programs with a minimum investment of between $10,000 to $15,000. But that minimum investment standard is changing. Because of the popularity of wrap accounts, 'mini' wraps are sprouting up among financial houses to attract investors who have smaller portfolios. Often investors who start up with a mutual fund wrap account will graduate to traditional wrap programs as their assets grow.

As new products enter the financial market, the costs vary. The fees for a wrap account through a brokerage firm usually range between 2.5 and 3.5 per cent of assets annually. Mutual fund wrap accounts tend to offer lower fees but often charge sales commissions, which means you may have to pay a front-end load when you buy, or be liable for a redemption fee when you sell.

A Few Words of Caution

If you're interested in a wrap account, find out more about the specific features from the advisor. Consider the following

the selection of mutual funds may be limited to proprietary funds or just a handful of mutual funds to choose from

tax advantages (if any) will vary depending on the individual investor, and the account

find out about fees. There may be underlying mutual fund fees in addition to the fee for the wrap account itself

Your individual preferences, time horizon and goals determine whether a wrap account meets your investment needs. Think of a wrap account service as a premium vacation package. Some investors prefer the combination of service under one fee while others find it more cost-effective to have the flexibility of a self-managed account.