Mutual funds aren’t for everyone. Some investors are upset about being stuck with unexpected tax bills from their mutual funds while others want more control over their holdings-and still others just like the idea of being able to brag about individual stocks. For such investors, most brokerage firms have “wrap programs,” also known as separate accounts or managed accounts. By whatever name, in these arrangements you pay fees for asset management rather than commissions for specific transactions. Your fees entitle you to a substantial amount of personal advice from a broker or financial planner, particularly the development of an asset allocation. Once an asset allocation is in place, the financial advisor will help you choose money managers who’ll pick individual stocks for you to own.
Suppose, for example, you have $300,000 to invest and your advisor urges you to hold $100,000 (33%) in large-cap stocks. Your advisor will provide you with a list of large-cap managers to choose among, then go on to other categories. Money managers ordinarily require $500,000, $1 million, or more as a minimum investment. However, for these programs minimums usually are $100,000. Thus, investors who otherwise may not qualify for professional management of individual securities can participate: such programs might be appropriate for investors with portfolios of $250,000 or more.
Realistically, investors with $250,000 or so can’t expect a custom-designed portfolio but they will be able to receive a substantial degree of tailoring. You might, for example, have tobacco or liquor companies excluded from your portfolio, if that’s your wish. For tax planning, the manager can “harvest” losses among individual stocks, then use those losses to offset capital gains.
The cost: Officially, these programs charge investors 3% of assets per year but many firms will negotiate published rates down to 2.4% or 2.5%. (See related item below.)
