Wrap It Up: Terms and Benefits of Managed Money (2024)

The termwrap account was created to refer to a product offering a multitude of investment or brokerage services "wrapped" in a single fee. Initially, the wrap business was a niche product used primarily by institutional investors and ultra-high-net-worth individual investors.

The wrap industry has since broadened its offerings to become accessible to many retail investors; these new accounts are often known as managed money accounts. These services offer a variety of benefits but may not be the best choice for all investors.

Key Takeaways

  • Managed money accounts are a type of fee-based investment account that gives investors access to a professional financial advisor.
  • Wrap accounts are a type of managed account that have a single wrap fee, which is a percentage of assets under management.
  • Other types of managed money accounts include mutual fun advisory programs, fee-based brokerage accounts, and ETF wraps.
  • Many managed money accounts have high minimum investments, putting them out of reach for many retail investors.
  • Buy-and-hold investors may be better off paying occasional commissions for trades, rather than a quarterly or annual account fee that can eat into returns.

How Managed Money Works

In the brokerage industry, the traditional definition of the term brokerrefers to an investment professional who helps match buyers and sellers in exchange for a commission. The size of a traditional broker's paycheck is based on the volume of transactions brokered; if no trades take place, the broker doesn't get paid, regardless of whether they provided any investment advice to clients.

This role of the broker changed, however, as some brokers started to offer wrap accounts, requiring them to manage money as well as complete client transactions. Thus, brokers took on the responsibilities of advisors, not only completing transactions (a service that on its own does not regard the assets currently within the client's account) but also providing portfolio management.

When an investment professional, whether a broker or advisor, works with managed-money products, they are paid a flat fee. This fee is recurring regardless of the number of transactions that take place in the investor's account. Fee-based investing, as this business model is called, compensates investment professionals for the advice they provide, not for the number of transactions that they generate.

Wrap Accounts vs. Managed-Money Accounts

Wrap accounts are a type of managed money account. Traditionally, wrap accounts were a type of account that was primarily available to high-net-worth investors or institutional investors. The fees associated with these accounts made them impractical for the majority of investors.

As advances in technology reduced the minimum required investment, however, the wrap account became available to an audience of affluent retail investors. Wrap accounts are generally available with a single fee, charged either quarterly or annually, to cover all management and administrative expenses, as well as commissions.

This fee is charged based on the total value of assets under management in the account. For example, if your advisor's fee is 1% and your portfolio contains $100,000, they earn $1,000 per year. If your portfolio grows to $200,000, that same 1% fee is now worth $2,000.

Wrap accounts are generally appropriate for retail investors with a significant amount of money in their investment account. Otherwise, the fees associated with the account may cut into returns. They are also best for investors who want professional advice and hands-on management of their investments. Buy-and-hold investors, on the other hand, may be better off paying occasional trading fees, rather than a monthly or annual wrap fee.

Some firms may use the broader term "managed money" to describe wrap accounts to more easily communicate the product's benefits as well as its price structure.

Benefits and Drawbacks of Managed Money

Benefits

Drawbacks

  • High minimum investments

  • Fees reduce profits

  • Accessing money

  • Lack of transparency

Benefits of Managed Money

  • Professional advice: When you invest in fee-based products, you receive the benefit of ongoing consultation with a professional financial advisor. The advisor is responsible for managing your financial plan to meet both your short- and long-term goals.
  • Fiduciary responsibility: Managed money advisors have a fiduciary duty to their clients. They are legally required to act in the client's financial best interests, rather than encouraging them to make trades or purchase products that are in the advisor's best financial interests.
  • Simple fee structure: With a managed money account, the fee structure is predictable, allowing you to plan for fee payments and understand how they will impact your returns.
  • Reduces churning: Managed money advisors have a financial incentive to seek out the best available products rather than selling those that pay high commissions. This lessens the likelihood of churning, or making more trades than necessary to generate more commission fees.

Drawbacks of Managed Money

  • High minimum investments: Since advisors' fees are based on a percentage of assets under management, many will only work with clients above a certain net worth. Account minimums can range from several thousand to hundreds of thousands of dollars.
  • Fees reduce profits: Even for investors with a high enough net worth to qualify, account fees can eat into profits as your account grows.
  • Accessing money: In some cases, it may be difficult to access money from a managed account, whether to invest an additional amount or make withdrawals. You will need to work with your advisor to plan for this more limited access.
  • Lack of transparency: Some firms have a history of not disclosing additional fees to managed money accounts. Investigations into managed money accounts have also found that some advisors don't assess changes to their clients' financial needs over time to determine whether their managed money accounts are still the best choice.

Types of Managed Money Accounts

There are five primary investment vehicles in the managed-money environment, each offering different features and benefits. The particulars of each vary based on the firm providing the services, but here are the general categories:

Traditional Managed- or Separate-Account Programs

Unlike mutual funds, where many investors pool their assets to access the services of a professional money manager, traditional managed-account programs (also known as "separate accounts") allow investors to contract the services of a professional money manager for an account that is separate and distinct from the accounts of other investors. These services include significant tax management and portfolio customization. Investment decisions are based on the investor's individual needs, not on the generic needs of a portfolio designed to represent a pool of investors that may number well into the thousands.

Mutual-Fund Advisory Programs

The term "mutual fund wrap" has largely been replaced by "mutual fund advisory program" to describe a portfolio of mutual funds selected to match a preset asset allocation model appropriate for an investor's goals, offered in a single investment account together with the services of a professional investment advisor. The account is automatically rebalanced to maintain the asset allocation modeland provides consolidated performance reporting regardless of the number of mutual funds in the model.

A variety of asset allocation models are available with equity-to-fixed-income proportions, such as 100% equity, 80/20, 60/40, 50/50, 40/60, 20/80, or 100% fixed income. A professional financial advisor works with the investor to determine which asset allocation model is appropriate for the investor's goals, risk tolerance, time horizon, and other considerations,and provides ongoing guidance in the pursuit of the investor's financial objectives

Fee-Based Brokerage Accounts

Unlimited trading with no commission fees makes the fee-based brokerage account an attractive tool for frequent traders. The fee includes ongoing guidance of a professional financial advisorand provides a measure of comfort for the do-it-yourselfer who prefers a bit of expert assistance.

Multidiscipline Accounts

Multidiscipline accounts combine the services of multiple separate account managers into a single portfolio. This portfolio offers all the benefits of a traditional managed-account portfolio—and more—at reduced investment minimums. Activities across each of the different managers of the portfolio are coordinated by an overlay manger to maintain compliance with the wash-sale rule and minimize capital gains tax liabilities.

ETF Wraps

ETF wraps are one of the latest entrants to the managed-money arena and are similar to mutual fund wraps but use exchange-traded funds​​​​​​​ instead of mutual funds as their investment vehicles. Since ETFs have lower expense ratios than mutual funds, ETF wraps have a strong appeal to cost-conscious investors.

What Help Does a Managed-Money Account Advisor Provide?

A managed-money advisor is responsible for helping clients create a financial plan that will meet both short- and long-term financial goals. These can include examining your overall financial situation, determining your risk tolerance, helping you set goals, recommending an asset allocation that is appropriate for your goals, assisting with investment selection, and monitoring your portfolio and the progress toward your goals.

Who Can Benefit From a Managed-Money Account?

Managed money accounts can be appropriate for many retail investors as long as they have a high enough level of assets under management to make the annual fees worthwhile. Particularly for active traders, the annual fee on this type of account may be less expensive than paying a fee for every transaction.

What Is a Retail Investor vs. Institutional Investor?

An institutional investor is an organization or company that invests on behalf of other organizations or companies. A retail investor is an individual who invests their own money.

Are Mutual Funds Managed-Money Accounts?

A mutual fund is technically a type of managed account, since a manager looks after the fund and rebalances it periodically to continue meeting the funds objectives. Mutual funds are a kind of managed money account generally has very low minimum investment requirements, making them more accessible to everyday investors.

The Bottom Line

Managed money offers a degree of convenience and peace of mind that few other investment options can provide. These features have made fee-based investing and managed-money investment vehicles popular among affluent retail investors. But these vehicles still pose some complexity that makes them unsuitable for investors with lower net worths or who want to pursue a buy-and-hold investment strategy.

Before opening any kind of managed money account, consult a professional financial advisor to find out if it's right for your portfolio and investment objectives.

Wrap It Up: Terms and Benefits of Managed Money (2024)

FAQs

What is the meaning of managed money? ›

What is Managed Money? Managed money is a means of investment whereby investors rely on the investment decisions of professional investment managers rather than their own. These investments will incur fees that can vary by the type of professional money management utilized.

What is the difference between a wrap account and a managed account? ›

Wrap accounts are a type of managed account that have a single wrap fee, which is a percentage of assets under management. Other types of managed money accounts include mutual fun advisory programs, fee-based brokerage accounts, and ETF wraps.

Is Fidelity professionally managed account worth it? ›

Fidelity distinguishes itself with professional-grade research, screening and trading tools. With zero commissions being the norm, its lack of account management fees nudges the platform ahead. This is an exceptional platform for investors who ascribe to fundamental investment research.

Are managed funds worth it? ›

Fund investing is an excellent choice for time-poor investors or those who don't yet have the financial knowledge to start stock-picking on their own. A fund manager makes the investments on behalf of the fund, meaning you can rely on their industry expertise.

What is the meaning of manage money? ›

Money management is the process of tracking expenses, investing, budgeting, banking, and assessing tax liabilities; it is also called investment management. Money management is a strategic technique to deliver the highest interest-output value for any amount spent on making money.

What is the purpose of a managed fund? ›

By using a managed fund, investors' money is pooled together and is used by the investment manager to buy investments and manage them on behalf of all investors in the fund. By pooling funds, investors can gain access to investment opportunities that they may not be able access if acting on their own.

What are the benefits of a wrap account? ›

Allows individual investors to pool their funds so that they can invest in a wide choice of investments, usually at wholesale prices. Typically used by financial planners for reporting convenience. Also known as an investment platform or wrap account.

What are the two types of fund wraps? ›

A mutual fund wrap uses mutual funds as its assets. Pooled wraps are similar to mutual fund wraps, but use pooled funds as their assets.

What are wrap payments? ›

A wrap account is an investment account where a "wrapped" fee or fees cover all of the management, brokerage and administrative expenses for the account. The fee or fees are generally based on the total market value of the investment account. Learn more.

What is the downside to Fidelity? ›

Fidelity has average trading and low non-trading fees, including commission-free US stock trading. On the negative side, margin rates and fees for some mutual funds can be high. We compared Fidelity's fees with two similar brokers we selected, E*TRADE and TD Ameritrade.

How much does Fidelity charge to manage your money? ›

Fidelity Go® offers tiered pricing based on your account balance. You'll pay no advisory fee for a balance under $25,000, or 0.35% per year for any balances of $25,000 and over. Either way, there are no trading fees, transaction fees, or rebalancing fees.

Who is the best fund manager at Fidelity? ›

Among diversified fund managers, Tom Allen is coming on strong at VIP Mid-Cap Stock; Matt Fruhan, who recently took over Large Cap Stock (FLCSX), has a career record that bodes well; Brian Hogan at Blue Chip Value (FBCVX), who is also the manager of the equity stake in Strategic Dividend Income (FSDIX), remains the ...

Can I withdraw my managed funds? ›

Managed funds can have fees or restrictions on when you can withdraw your money. Some funds won't allow you to withdraw your money until a certain point in time. For example, 12 months after your investment. Other funds may freeze or stop withdrawals to protect all the members' investments.

Do you pay tax on managed funds? ›

Managed funds do not generally pay tax because their income (including net capital gains) is distributed to investors annually. Investors pay tax on distributions at individual marginal tax rates.

How much should you pay for a managed fund? ›

Managed fund fee types
DescriptionApplies toWhat's normal
Investment or indirect cost ratio How much you have to pay to your investment manager.Account balance0.15% to 1.5%
Performance Bonus fee paid to your investment manager if they do very well.Account balance0.1% to 0.5%
4 more rows

What is it called when you manage money? ›

Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax, and estate planning.

What is the difference between managed money and mutual funds? ›

Managed account trades can be timed to minimize tax liability; mutual fund investors have no control when a fund realizes taxable capital gains. Managed account-holders have maximum transparency and control over assets; mutual fund-holders don't own the fund's assets, only a share of the fund's asset value.

Why would someone have a managed account? ›

The investor hires a professional investment manager to oversee the account's operations to achieve specific objectives, such as long-term growth or current income. It is a way for an institutional investor or individual investor to benefit from a private investment manager's professional expertise.

References

Top Articles
Latest Posts
Article information

Author: Chrissy Homenick

Last Updated:

Views: 5918

Rating: 4.3 / 5 (74 voted)

Reviews: 81% of readers found this page helpful

Author information

Name: Chrissy Homenick

Birthday: 2001-10-22

Address: 611 Kuhn Oval, Feltonbury, NY 02783-3818

Phone: +96619177651654

Job: Mining Representative

Hobby: amateur radio, Sculling, Knife making, Gardening, Watching movies, Gunsmithing, Video gaming

Introduction: My name is Chrissy Homenick, I am a tender, funny, determined, tender, glorious, fancy, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.