A wrap account is an investment portfolio that is professionally managed by a brokerage firm for a flat fee that is charged quarterly or annually. The fee is based on total assets under management (AUM). It is comprehensive, covering all administrative, commission, and management expenses for the account.
Wrap fees range from about 1% to 3% of AUM.
For many investors, a wrap account proves to be less expensive over time than a brokerage account that charges commissions for trading activity. However, the buy-and-hold investor who rarely sells holdings might be better off with a commission-based fee structure.
Understanding the Wrap Account A wrap account has the advantage of protecting the investor from overtrading, which can occur if a broker buys and sells assets in the account excessively in order to generate more commission income. This is known as "churning."
In a wrap account, the broker is paid a percentage fee based on the total assets in the account and thus is incentivized to get the highest possible return on the amount invested.1