Integrating Wrap Accounts Into Your Practice

Weary after disappointing returns and poor performing investments in her portfolio, your client needs a plan to make her money work for her.

You could be the financial professional who takes her there–with the right approach. In some cases, this approach might be through adroit use of wrap accounts.

Wrap accounts have evolved over the past 25 years from vehicles designed for institutions and the very affluent to an option for the everyday investor.

These accounts provide professional and customized portfolio management via oversight, administration and money management of a basket of investments. Instead of applying sales charges, the wrap account model charges the client an annual fee, usually ranging from 1% to 2% of assets under management.

There are different types of wrap accounts. These include the popular mutual fund wrap account that bundles funds from a number of companies, allowing the customer to customize asset allocation strategies and fund companies.

In an April 2003 study by Financial Research Corporation, Boston, Mass., 75% of 276 representatives who currently use mutual fund wrap programs indicated they plan to increase their usage.

There are several advantages to this type of client-advisor relationship, but the following three are very compelling:

Reduced risk, enhanced return. After exploring a clients risk tolerance, time horizon and investment objectives, you can search from thousands of funds, and use the most consistent and better performing fund managers in each asset class. Covering five or more asset classes equally helps ensure that your client doesnt end up with a large percentage of the portfolio in what turns out to be the worst performing asset class for the year.

Flexibility to change investments. It is painful to watch a clients portfolio go south. You feel powerless to make improvements in the face of regulatory scrutiny and expense to the investor. Because there are no sales charges in a wrap account, the advisor can be proactive with a clients investments based on changes in the market, fund management or shifting investment objectives. Rebalancing becomes part of the service at intervals appropriate to the clients situation.

The representative receives an annual fee to manage the assets in a way that will maximize their growth. As a result, the financial professional is able to give advice with conviction. This frees the advisor to do what is best for the client. Rather than executing a series of buys or sells in isolation, the wrap account advisor holds a snapshot of the clients total financial picture: investable assets, an understanding of objectives and a mutually beneficial reason to build wealth.

A “nondiscretionary” account model is a good place to start exploring the world of wrap accounts. In this model, the transactions need the clients blessing. The rep does not have to be a registered investment advisor to provide this investment process. Typically, reps who use the nondiscretionary model evaluate the clients current financial status, define their investment goals, determine risk tolerance, select an asset allocation model, implement specific investments (once approved by the client) and review annual progress.

Resources such as risk tolerance questionnaires, scoring systems, asset allocation models and screened funds lists help you tailor a financial plan from among thousands of investments. Clients receive one consolidated statement–which greatly simplifies their life, their record keeping and their tax reporting.

If a test-drive with one of the nondiscretionary methods has you thinking about moving more of your business to wrap accounts, do pursue additional licensing and education. This will deepen your knowledge of financial planning and keep you abreast of current trends in the field.

In my own case, for example, I have been a life, health and securities representative for years, but now I am in the process of becoming a registered investment advisor. Next, I will start on obtaining a certified financial planner designation.

Finally, dont use wrap accounts as a one-plan-fits-all approach. Be sure your clients needs and investable assets are appropriate. As more clients understand the value of a trusted advisor, in turn, they rely on objective advice to help grow their investments and plan for their future.

Danny J. Taylor is a representative registered with Safeco Investment Services Inc., Redmond, Wash., and works through Taylor and Associates Inc., an independently owned and operated firm.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 11, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.