Wrapping Up Low-Effort Investing

Mary Benson, an attorney in the New York area, got the unhappy news late last year. Her company, which was restructuring, suddenly gave her a sizable "buyout" package.

This year, Ms. Benson (not her real name) cashed in her settlement, and washed her hands of the money.

She followed the lead of a growing number of American investors, who turn their investment assets over to a single money-manager.

The high-net-worth crowd has done that for generations, but as more savers become investors, investment houses have made managed accounts more accessible.

Among the most popular versions is a "wrap" account. You turn all your assets over to one investment firm, establish some long-term goals, develop an investment plan, and the firm takes it from there, putting your money in the appropriate mix of stocks, bonds and mutual funds.

The term "wrap" comes from wrapping all your assets into one account as well as from the fact that all commissions and fees get wrapped into one annual fee - usually 2 to 3 percent of the assets.

If you normally trade securities frequently through your broker, you might actually save some money on commissions. And the set fee means your broker has less incentive to "churn" your account, trade excessively to generate commissions.

Even so, brokerage houses like wrap accounts, because it means they lock in all or most of a client's business for a long time.

And investors seem eager to dance to the same tune.

More than $103 billion now sits in wrap programs that specialize in all types of securities, up from around $77 billion in 1994, according to Cerulli Associates, a financial consulting firm in Boston.

A new wrinkle to the wrap idea is mutual fund wraps, which now include another $36 billion.

If you are all thumbs when it comes to handling money or lack the time or temperament to oversee investments, you might find wrap accounts the right vehicle.

Mutual fund wrap accounts provide greater diversity to protect against risk, and possibly generate greater returns.

Ms. Benson and her husband, a psychologist, say they are pleased with their program.

Protection against volatile times

Wrap accounts began in the 1970s and found favor largely with affluent investors.

Consultant-based plans present a fairly high investment hurdle, often a starting point of $100,000 in assets, says Andrew Guillette of Cerulli. However, some mutual fund plans now set the bar as low as $10,000.

Statistics measuring investment performance of wrap accounts are hard to come by, but some experts say the current volatility in the financial markets makes a good argument for wrap accounts.

"In the market crash of October 1987, the average mutual fund was down between 19 percent and 22 percent," says Frank Campanale, president of Smith Barney Consulting Group, in Wilmington, Del. "Our average [wrap] account was down 13 percent."

With the stock market now swinging more than 100 points a day and some analysts comparing the current climate to the pre-cash markets of 1929 and 1987, a professional could make sense.

Research by Cerulli shows that money in wrap mutual fund plans tends to be quite stable despite market gyrations. That suggests that such plans are meeting investor needs, Mr. Guillette says.

Smith Barney claims to have invented the wrap account and is currently the market leader. It pulls in about half of all wrap account assets.

Other brokerage houses were quick to learn the lyrics. The likes of Merrill Lynch, Dean Witter, and Prudential have all become major players in the field. And mutual fund groups, including Fidelity, Stein Roe, and Strong learned quickly how to wrap, as well.

A rap on high fees

But not everyone likes them. Critics - including a number of prominent financial writers - argue that wrap accounts cost too much and mainly benefit brokerage firms.

Fees are "too steep," says Marshall Loeb in his book "Lifetime Financial Strategies." Why pay 3 percent of assets for a managed account, critics ask, when you can buy no-load mutual funds that charge 1.5 percent or less?

"The extra 1 percent or so," Guillette responds, may be worthwhile if a wrap plan ensures that your assets are diversified and allocated according to your investment needs.

Moreover, consultation charges are falling, Guillette notes. In the case of mutual fund wraps, the typical advisory fee is around 1.25 percent, he says, plus an expense ratio of around 0.96 percent. That means the total fee on mutual fund wraps is around 2.21 percent.

Let's say you want to invest just in mutual funds through a wrap account. Smith Barney offers a mutual fund wrap, called TRAK, in addition to its regular wrap. The company says it has over 100,000 retail clients, who have kicked in over $9 billion.

With a $10,000 minimum, you can invest in 13 no-load mutual funds run by Smith Barney, says TRAK director Anne Gray. With $25,000, you can invest in no-loads from 28 outside fund families, including Scudder, Dreyfus, and Strong.

Key Questions

If you open a wrap account, don't sign on the dotted line without asking these questions:

* Are you locked into specific investments for a set period of time? What if you want to change the mix? You should have the ability to tell your consultant to shift assets around at least quarterly. Have as much flexibility in your plan as possible.

* Are your costs inclusive? Your total fee should not be over 3 percent. The going industry rate, with discounts, is now about 2.5 percent of assets.

* Is your adviser steering you to company-only mutual funds? In low-cost mutual fund wrap plans, you generally must buy one fund company's funds. But how have those funds performed relative to their competition? If your company won't answer, call another.

* Compare prices between different financial houses. Ask about discounts.

* Don't overlook alternatives to wrap mutual fund accounts: These include Lifecycle funds, which are designed to meet your goals at different periods in your life; asset allocation funds, which are similar to wraps in that they steer you to specific categories of investments; and "funds of funds," mutual funds that buy other mutual funds. Vanguard, for example, offers low-cost funds that invest in other Vanguard mutual funds.

Got a question about "wrap accounts" mutual funds, retirement, taxes, or some other detail of personal financial planning?

Send them here.

We'll talk to the experts.

We'll get the answers.

We'll print them in the Monitor's Monday Personal Finance page.

The next question and answer session is scheduled to run Monday, August 4.

Write Guy Halverson at:

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