Have you heard of managed accounts in trading? These are something that some would disagree to consider because there is a risk of fraud or being scammed. These are accounts managed by other people while you give the money. Some hire these managers because they want to trade to earn money, but they do not know how or are not confident enough. They say that it is better to learn than let other people trade for you. It makes sense. However, some people have their own reasons for their preferences.
Managed accounts for investment portfolios
There are brokerage firms that offer to manage investment portfolios professionally. We call them wrap accounts. However, these do not come for free. Brokerage firms charge a flat fee quarterly or annually for wrap accounts, depending on the AUM or total assets under management. It ranges from around 1% to 3% of the AUM. Wrap accounts cover most expenses for the account, and when we say expenses, we refer to administrative, commission, and management expenses.
Why wrap accounts?
People who tried wrap accounts can say that they spent lesser money in the long run than engaging with brokerage accounts that ask for commissions for trading activities. But what about those who do not usually sell holdings? For instance, don’t you think that buy and hold investors will get their best interests on a structure that charges commissions?
In trading, there is a term that we call “churning.” It refers to overtrading, where the broker buys and sells assets too much to have more commission income. If you have a wrap account, this is something that you can avoid. Hence, it is a protection for investors from churning brokers. Wrap accounts pay brokers a percentage fee depending on the account’s total assets. This removes all the incentives, so the investor gets the highest possible return on the invested amount.
The difference between wrap and traditional accounts
While some frauds and scammers can take your money away after you ask them to manage your account, there are professional ones that you can trust. You need to give an investor access to that professional who will manage your money in a wrap account. Many of these professionals work with high-net-worth individuals and even institutions. Many mutual fund companies that have wrap accounts can give you access to a massive mutual fund selection. But here is the thing: a wrap account has a minimum investment requirement. This amount is around $25,000 to $50,000. If you find this amount quite massive, another option offers a lower initial investment requirement. You can rather opt to check out mutual fund accounts. The fees work in different ways. Not only do they pay for the brokers, but they also pay for marketing and distribution costs. This fee is an additional payment on top of a mutual fund wrap account investor.
On the other hand, we have traditional accounts. If you prefer the long-term buy-and-hold strategy, it might be best for you to stick with conventional accounts with a standard fee structure.
Should I use a wrap account?
Are you an investor who wants frequent updates, management, and advice? If that is the case, wrap accounts may be a good idea for you. However, if you prefer the buy and hold strategy, it is wiser to pay the seldom fees that your account accumulates.