In my securities arbitration practice, I have witnessed a disturbing trend in which stockbrokers–eager to develop a lucrative fee-based advisory business–are moving all of their clients into wrap accounts. In a “wrap account,” an investment advisor agrees to help manage a client’s money for an annual fee which covers all commissions and administrative expenses. Wrap account fees can range from 1.5 to 2.5% of the portfolio’s value. Because wrap account trades are commission-free, they are best suited for investors who intend to do a lot of trading. The trouble is, most investors neither want nor need a large amount of short-term stock trading. For occasional traders, a traditional commission-based brokerage account may be the most economical way to invest.
Dan Solin, who is a securities attorney, best-selling author and investment advisor, recently published an article in the Huffington Post featuring a case of mine that involved a wrap account offered by Wells Fargo Advisors ( formerly Wachovia Securities). In that case, the broker had transformed his entire brokerage practice into a “wealth management firm” by placing all his clients into wrap accounts that were managed by outside money managers. The arbitrator in that case agreed that moving a retired individual into a wrap account that charged 2.5% per year to invest primarily in equities was asking for trouble. In that case, the wrap account benefitted the broker, not the customer, since the broker would have earned very little in the way of commissions had the customer simply bought and held conservative income-oriented investments.
What should a conservative investor who needs a little hand holding do? The most frugal course of action is to hire an independent financial planner that charges an hourly fee to help develop a long-term investment strategy and periodically assist with rebalancing and adjusting the portfolio. Even at $400 per hour, the savings can be significant compared to paying 1.5 to 2.5% per year to a so called wealth manager.