What is a mutual fund wrap program?
A mutual fund wrap program is a platform through which investors pay fees to gain easy access to a plethora of mutual funds. Not to be confused with a mutual fund platform providing free access to thousands of funds, wrap programs tack on their own annual fees and highlight funds normally burdened by sales commissions.
Wrap programs are presented as a way to avoid these sales loads: You pay the annual charge of a percent or two on your entire balance while the broker exempts you from A-, B-, and C-share commissions.
Why you should avoid mutual fund wrap programs
Damaging fees
Mutual fund wrap programs were created to collect commissions while masking them. The funds they include already charge for portfolio management and administration. Wrap fees are an added expense collected and paid to salespeople.
Fund wrap fee rates vary, often falling in the 0.5-2% range. Combining all expenses, a managed fund in a wrap program could cost well over 2-3%; enough to wipe out the income of many bond funds and a substantial portion of stock returns.
Lack of service
Mutual funds are managed by portfolio managers and staff to whom fees are paid. Fund shares also incur administrative costs. Portfolio management and administration are actual services. The fees charged for access to a wrap program have nothing to do with service or benefit to you. They create revenues for salespeople.
What you should do instead
If your investments are held at an institution with a fee-charging mutual fund wrap program, whether or not you participate in that program you should switch institutions. The wrap is most likely only one of many mechanisms they have in place to strip your assets. Click here for help finding a better institution.
If you are not attached to your fund choices, this is a good time to reassess your regimen. Click here for guidance.
* Data sources:
Stock returns: S&P Dow Jones Indices LLC; Standard & Poor’s 500 Index.
Bond returns: Federal Reserve Release H-15; An index of equal parts (25% each) Moody’s Aaa corporate bonds, Moody’s Baa corporate bonds, 5-year Treasury bonds, and 10-year Treasury bonds, rebalanced annually.
Fund expense rates: Investment Company Institute averages – managed stock funds 0.89%, indexed stock funds 0.12%, managed bond funds 0.65%, indexed bond funds 0.11%.
Wrap account expense rates: stocks 2%, bonds 1.5%.