Thursday, November 1, 2007

Common Investment Traps: Wrap Accounts

A few years after I began investing with a full service brokerage firm, my advisor Mike seemed excited to be offering me the chance to get in on a new type of account. For 1% of my assets each year, a professional money manager would handle my account making investments specifically suited to my needs.

I misunderstood how this would work at first. I thought that this money manager would be picking individual stocks for me and running my account like its own little mutual fund. It turned out that my account would actually hold several mutual funds with the mix of funds shifted around once in a while as I got older.

At the time I was just starting to understand mutual fund management expenses and financial advisor fees, and the rest of the conversation with Mike went something like this:

Me: “So, each year I would be paying the MER on the mutual funds plus another 1% to you guys?”

Mike: “Uh, yeah, but ...” followed by a bunch of confusing reasons why this was a good idea anyway.

Me: “No, thanks.”

It’s not just full service brokerage firms that offer individual investors the chance to pay higher fees. The Canadian banks have been successful at getting people to put money into wrap accounts. The amount charged above the mutual fund MERs is usually less than 1%, but the added expense is still usually not worth the purported benefits. Investors can save money by choosing their own mutual funds or save even more with low cost index funds.

This is part 2 of 3 parts. Next part. Back to part 1.

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