The wrap account is a special type of investment account structure that may exist between an investor and an authorized dealer or broker. Essentially, the wrap account provides the manager of the account with full authorization to act on behalf of the investor. This means that the wrap account creates a situation where a brokerage can initiate transactions on behalf of the investor without the need for prior consultation.
Wrap accounts require written authorization from the investor in order to become functional. Generally, the terms of a wrap account will provide coverage for all the standard and usual tasks that are necessary to handle the investment portfolio. Brokerages who offer the wrap account option to investors will provide all administrative and management functions for a flat rate. In addition, the flat rate will also replace the issuance of commissions on the transactions, as well as eliminate individual service charges.
The individual wrap account is managed separately from all other wrap accounts currently in force with the firm. In order to ensure the portfolio is managed efficiently, the brokerage will most likely utilize what is known as a model portfolio. Essentially, the model is a profile that is similar enough to the individual investor portfolio that it will help keep the brokerage abreast of transactions that may be in the best interests of the investor who is enrolled in the wrap fee program.
Generally, this fund of funds approach to managing investments is covered with a quarterly or annual fee that may be debited directly to the portfolio, or billed separately to the investor. Many brokerages allow investors to establish a wrap account at the beginning of the working relationship, as well as after working with the firm for a number of years. For people who are busy with other aspects of life, the wrap account can be the ideal way of growing the investment portfolio, since the strategy employs the use of highly trained professionals to manage the investments.