Objective information about financial planning, investments, and retirement plans

Are Brokerage Wrap Accounts a Good Idea?

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A reader recently emailed a question regarding a brokerage wrap account he had inherited from a relative.   He mentioned that he was being charged a one percent management or wrap fee and also suspected that he was incurring a front-end load on the A share mutual funds used in the account.

Upon further review we determined that the mutual funds were not charging him a front-end load.  Almost all of the funds being used, however, had expense ratios in excess of one percent plus most assessed 12b-1 fees paid to the brokerage firm as part of their expense ratios.

Are brokerage wrap accounts a good idea for you?  Let’s take a look at some questions you should be asking.

What are you getting for the wrap fee? 

This is the ultimate question that any investor should ask not only about wrap accounts but any financial advice you are paying for.

In the case of this reader’s account it sounds like the registered rep is little more than a sales person who put the reader’s uncle into this managed option.  From what the reader indicated to me there is little or no financial advice provided.  For this he is paying the brokerage firm the one percent wrap fee plus they are collecting the 12b-1 fees in the 0.25 percent to 0.35 percent on most of the funds used in the account.

Before engaging the services of a financial advisor you would be wise to understand what services you should expect to receive and how the adviser and their firm will be compensated.  Demand to know ALL aspects of how the financial advisor will be compensated.  This not only lets you know how much the relationship is costing you but will also shed light on any potential conflicts of interest the advisor may have in providing you with advice.

What’s special about the wrap account? 

While the reader did not provide me with any performance data on the account, from looking at the underlying mutual funds it would be hard to believe that the overall performance is any better than average and likely is worse than that.

Whether a brokerage wrap account or an advisory firm’s model portfolio you should ask the financial advisor why this portfolio is appropriate for you.  Has the performance of the portfolio matched or exceeded a blended benchmark of market indexes based on the portfolio’s target asset allocation?  Does the portfolio reduce risk?  Are the fees reasonable?

What are the underlying investments? 

In looking at the mutual funds used in the reader’s wrap account there were a few with excellent returns but most tended to be around the mid-point of their asset class.  Their expenses also tended to fall at or above the mid-point of their respective asset classes as well.

Looking at one example, the Prudential Global Real Estate Fund Class A (PURAX) was one of the mutual funds used.  A comparison of this actively managed fund to the Vanguard REIT Index Fund Investor shares (VGSIX) reveals the following:

Expense ratios:

PURAX

VGSIX

Expense Ratio

1.26%

0.24%

12b-1 fee

0.30%

0.00%

 

 Trailing returns as of 12/31/14:

1 year

3 years

5 years

10 years

PURAX

14.03%

14.47%

11.12%

6.66%

VGSIX

30.13%

16.09%

16.84%

8.41%

 

While the portfolio manager of the wrap account could argue the comparison is invalid because the Prudential fund is a Global Real Estate fund versus the domestic focus of the Vanguard fund I would argue what benefit has global aspect added over time in the real estate asset class?  Perhaps the attraction with this fund is the 30 basis points the brokerage firm receives in the form of a 12b-1 fee?

Looking at another example the portfolio includes a couple of Large Value funds Active Portfolios Multi-Manager A (CDEIX) and CornerCap Large/Mid Cap Value (CMCRX).  Comparing these two funds to an active Large Value Fund American Beacon Large Value Institutional (AADEX) and the Vanguard Value Index (VIVAX) reveals the following:

Expense ratios:

CDEIX

CMCRX

AADEX

VIVAX

Expense Ratio

1.26%

1.20%

0.58%

0.24%

12b-1 fee

0.25%

0.00%

0.00%

0.00%

 

Trailing returns as of 12/31/14:

1 year

3 years

5 years

10 years

CDEIX

10.01%

NA

NA

NA

CMCRX

13.11%

19.30%

12.98%

5.78%

AADEX

10.56%

21.11%

14.73%

7.57%

VIVAX

13.05%

19.98%

14.80%

7.17%

 

Again one has to ask why the brokerage firm chose these two Large Value funds versus the less expensive institutionally managed active option from American Beacon or the Vanguard Index option.  I’m guessing compensation to the brokerage firm was a factor.

Certainly the returns of the overall wrap account portfolio are what matters here, but you have to wonder if a wrap account uses funds like this how well the account does overall for investors.

The lesson for investors is to look under the hood of any brokerage wrap account you are pitched to be sure you understand how your money will be managed.  I’m not so sure that my reader is being well served and after our email exchange on the topic I hope he has some tools to make an educated evaluation for himself.

The Bottom Line 

Brokerage wrap accounts are an attempt by these firms to offer a fee-based investing option to clients.  As with anything investors really need to take a hard look at these accounts.  Far too many charge substantial management fees and utilize expensive mutual fund options as their underlying investments.  It is incumbent upon you to understand what you are getting in exchange for the fees paid.  Is this investment management style unique and better?  Will you be getting any actual financial advice?

The same cautions hold for advisory firm model portfolios, the offerings of ETF strategists and managed portfolios offered in 401(k) plans.  You need to determine if any of these options are right for you.

Please feel free to contact me with your questions. 

Check out an online service like Personal Capital to manage all of your accounts all in one place.  Also check out our Resources page for more tools and services that you might find useful.

Peyton Manning and Investing Success

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I attended the Envestnet Advisor Summit at the Chicago Hilton this past week.  Excellent conference, Envestnet offers a robust platform for financial advisors.  A colleague urged me to attend and I’m glad I did.

The highlight of the conference was Peyton Manning’s keynote address on Friday morning.  Regular readers here know that I am diehard fan of the Green Bay Packers, but I think all football fans have to respect Manning’s skill and his character.  His address was about leadership and being a game changer.  I felt that several of his remarks and comments have a direct correlation to being a successful investor.

Peyton Manning

Thrive on discomfort 

Manning made this reference in terms of it being a key trait of game changers.  I think this is a key trait of successful investors as well.

The investing landscape has certainly undergone change and disruption since the beginning of this century.  We’ve experienced the bursting of the Dot Com Bubble, the financial crisis of 2008-09, the Flash Crash and many other disruptions.

Successful investors adapt to change and embrace it to their advantage.  In some cases this means knowing when to change their investing style, in others it means knowing when to stay the course.  It also means knowing how and when to use new investing tools like ETFs and others.

Ask questions 

Manning mentioned this as a key trait of leaders in business and something that he does constantly in an effort to guide his team to even greater levels of success.

Investors should always ask questions.  Some key questions include:

  • Would I buy this particular investment today?
  • Is there a better place for my money?
  • What are your conflicts of interest in terms of advising me to make this investment?
  • How does this investment fit into my overall portfolio?  

It’s over move on after a bad play

Manning cited the uncanny ability of 49ers great Joe Montana to lead his team to a touchdown on the series immediately following his having thrown an interception.

This is a key trait for successful investors to adopt.  I can’t tell you how many investors I’ve spoken to who want to hold a losing position until it breaks even.  The ability to accept an investment loss is critical.  Sometimes it is better to realize a loss and reinvest the proceeds elsewhere.  Even the best investors make bad investing bets.  The successful ones are capable of admitting this and moving on.

Invest in a coach to keep you growing

Manning hired the current Duke Head Football Coach as his offseason coach to help him improve his quarterback skills.  This individual was his offensive coordinator in college at Tennessee.  This is Peyton Manning, 5 time MVP and Super Bowl champion hiring a coach to help him improve his game!

Many investors do a great job of accumulating wealth and managing their investments.  At some point even the most successful ones realize that they might need some outside expertise to take things to the next level.

Perhaps this realization comes as their career and family obligations limit the time they can spend on their investments.  Often this realization comes as retirement approaches.

Hiring a financial advisor is not a sign of weakness; rather it is a sign that you realize the limits of your expertise and the best uses of your time.  If you are at this point here is a guide to choosing a financial advisor that might help you.

Peyton Manning spoke about leadership and did a great job of tying in his experiences as a leader in sports to what financial advisors need to do to lead clients to the successful outcomes they are seeking.  As I listened to him speak I couldn’t help but see the relevance of his message to what I believe it takes to be a successful investor in today’s dynamic investing world.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

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A Feast of Thanksgiving Financial Links

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In our house Thanksgiving is all about having the five of us together and eating way too much, passing out in a food coma and then eating some more.  In between the food, family, football, shopping, or whatever it is that you do over this holiday weekend here are some links to some great financial blogs if you have the time to do a little reading.

Money

Must-read financial blogs

I recently attended the FINCON conference for financial bloggers in St. Louis and had a chance to connect and reconnect with some of these great bloggers.  This is a list of finance blogs that in my opinion offer great financial information and insights.

Getting Your Financial Ducks in a Row

Consumerism Commentary

Barbara Friedberg Personal Finance

Mom and Dad Money

The Dollar Stretcher

Frugal Rules

Free From Broke

AAAMP Finance Blog

Len Penzo dot Com

Modest Money

PT Money

Cash Money Life

Wisebread

Money Crashers

Good Financial Cents

The College Investor

The Reformed Broker

FiGuide

Wealthcare For Women

This is not in any way, shape, or form an exhaustive list and I’ve certainly omitted some outstanding blogs.  None the less, the list above provides a great start in terms of finance blogs you should consider adding to your reading list.

Thanks for the recognition 

I want to thank Crain’s Chicago Business for featuring this blog in their recent article 8 must-read (and locally written) finance blogs.  My blog was profiled in The Chicago Financial Planner: A self-starter’s money guideNote this link might require you to log-in to their free limited subscription option. 

Jean Chatzky, the financial editor for NBC’s Today Show, was kind enough to mention this blog as her top pick for investing blogs in a piece for AARP Personal Finance Blogs You Should Read.

I hope that you and your families and loved ones have a great Thanksgiving holiday and enjoy the time spent together.

Please feel free to add any finance blogs or websites that you feel provide great information in the comment section below.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

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Friday Finance Links March 1, 2013 – Sequester Day 1 Edition

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Today is Day 1 of the Sequester which I don’t fully understand, but it is a process that is supposed to result in deep government budget and spending cuts.  I’m sure this will be the main news topic of the day and likely for some time to come.

Here are a few links to some great weekend financial reading.

Personal Finance Blogs 

Check out An Interesting Conversation with My Dad at Free Money Finance.

Miranda tells us about Choosing the Right Investment Adviser for You at Planting Money Seeds.

Andrea shares some Quick and Easy Tips for Healthy Living at Take a Smart Step. 

Posts from Fellow NAPFA Members 

Jim Blankenship shares Free Income Tax Filing Options  at Figuide.com.

Alan Moore asks How Do I Start Saving? 5 Tips To Get Started Today! at Figuide.com.   

Other financial articles from around the web

Chuck Jaffe tells us to Sequester-proof your finances at marketwatch.com.

Paul Merriman shares Two easy ways to lose big in 2013 at marketwatch.com.

Daniel Bortz asks Is an Online Financial Adviser Right for You? at usnews.com.

In case you missed it here is my latest post for the US News Smarter Investor Blog How Much Should I Contribute to My 401(k)? 

Here’s wishing everyone a great weekend.

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Friday Finance Links – February 15, 2013

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The title for the Chicago Auto Show, 2007, hel...

After a busy week a rather low key weekend is on tap for us.  I do plan on hitting the Chicago Auto Show if I can, one of the best events of the year.

Here are a few links to some great weekend financial reading.    

Personal Finance Blogs   

Long outlines 401(k) Plan Rollover Options at Budget for Wealth.

Carrie shares 3 Strategies to Run Your Freelance Business More Efficiently at Careful Cents.

Andrea shows us How to Organize Financial Paperwork at Take a Smart Step. 

Posts from Fellow NAPFA Members   

Bert Whitehead reveals What’s A Safe Portfolio Withdrawal Rate? at Figuide.com.

Jim Blankenship explains How Dollar-Cost-Averaging Can Work To Your Advantage For Your 401(k) at Figuide.com.   

Other financial articles from around the web  

Andrea Coombes explains 401(k) balances hit record highs at marketwatch.com.

Russell Kinnel tells us about A Great Influx of New Money Into Funds at morningstar.com.

Chuck Jaffee reveals the Hidden costs of ‘free’ ETF trades at Schwab at marketwatch.com.

In case you missed it here is my latest post for the US News Smarter Investor Blog Your 401(k): Good or Lousy? 

Here’s wishing everyone a great weekend.

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Friday Finance Links January 11, 2013

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I drove our son back to college so we are once again empty nesters.  The Packers are still alive in the playoffs and have a tough game tomorrow against the 49ers.  And yes it is 55 degrees here in Chicago in January.

Medicare

Here is some weekend financial reading for the first weekend of the New Year. 

Personal Finance Blogs 

Doug provides some great resources in The ROA Bulletin on Veteran Administration benefits, Medicare, and Medicaid at The Military Guide.

Kevin explains Retirement Planning in Your 20s at Cash Money Life.

Ken tells us how to Find Stocks Using a Stock Screener at AAAMP Blog.

Andrea addresses a Reader Question:  How to Find My Debt at Take A Smart Step. 

Posts from Fellow NAPFA Members 

Jim Blankenship tells us to Pay Yourself First at Figuide.com.

Curt Sheldon shares Military Retirement, VA Benefits and a Guy Named Strickland at Figuide.com. 

Other financial articles from around the web 

Mark Miller explains Health-Care Costs: Why Your Location Really Matters  at morningstar.com.

Ronald Orol reveals Money funds moving to publish NAVs daily at marketwatch.com.

Rob Silverblatt tells us What to Expect From Bond Mutual Funds in 2013 at usnews.com.

In case you missed it here is my latest post for the US News Smarter Investor Blog Dig Deep When Using Target Date-Funds.

Here’s wishing everyone a great weekend.

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Friday Finance Links December 28, 2012

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Happy new year

Another year is almost in the books.  It’s been great having all three of our kids home for the holidays.  I hope that you and your families have had a great holiday season as well.

Here is some great end of the year weekend financial reading: 

Personal Finance Blogs 

Julie shares Financial Lessons From “It’s a Wonderful Life” at Wisebread.

Emily tells us that You Can’t Afford the Costs of Drunk Driving in a guest post at PT Money.

Ken explains Cash Flow Statement Analysis: Purpose, Components, and Format at AAAMP Blog.

Luke launched his Naked With Cash series at Consumerism Commentary.  I am excited to be a part of this effort.

Other financial articles from around the web 

Phillip Moeller asks 8 Important Retirement Money Questions for 2013 at usnews.com.

Melody Juge shares Five big IRA beneficiary concerns at marketwatch.com

David Ning discusses How to Tell if You Should Downsize in Retirement at usnews.com.

I took a week off from contributing to the US News Smarter Investor Blog, but here is a link to my author page where you can check out all of my prior posts. 

Here’s wishing everyone a happy, healthy, and prosperous 2013.

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Friday Finance Links November 16, 2012

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I’m looking forward to watching the Packers play the Lions on Sunday from the comfort of our family room.  The

saving and spending

past several games have come opposite the Bears and we’ve had to migrate to the local sports bar to catch the action.

Here are some great articles for your weekend finance reading: 

Personal Finance Blogs 

J.P. explains What is a Trailing Stop Order? at Novel Investor.

Andrea urges Stay at Home Moms: Stop Feeling Like You Have no Say in Your Family Finances at Take A Smart Step.

Steve Stewart asks Seriously, What’s 1 percent gonna do? at Money Plan SOS.

Kevin Mercadante tells us How to Move Your Retirement Savings into High Gear in a guest post at Cash Money Life.

Ken Faulkenberry shares Money Proverbs – 17 Smart Savings at AAAMP Blog. 

John asks Are Large Companies Immune to the Fiscal Cliff? at Frugal Rules.

Posts from Fellow NAPFA members

Jim Blankenship shares Save 1% More Here Are 7 Ways To Do It at FiGuide.com.

Claire Emory outlines Retirement Planning Mistakes To Avoid at Figuide.com.  

Other articles from around the web

Manish Malhotra claims that Annuities get a bad rap at marketwatch.com.

Christine Benz shares A Conservative Retirement Portfolio: The ETF Version at morningstar.com.

Investors Underestimating Retirement Needs, Survey Says at Financial Advisor.

In case you missed it here is my latest post for the US News Smarter Investor Blog Do Mutual Fund Companies Matter? 

Here’s wishing everyone a great weekend.

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Friday Finance Links November 2, 2012

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Halloween is behind us, I’ve consumed my quota of Butterfinger candy bars until next Butterfingeryear.  This is also the last weekend for listening to those annoying campaign ads, good riddance.  Lastly and most importantly, best wishes to all who were impacted by Sandy earlier this week.

Here are some articles and blog posts that I suggest for your weekend personal finance reading:  

Personal Finance Blogs 

Andrea Belzer Travillian asks What is an Index Fund and Should You be Investing in Them at Take a Smart Step.

Ornella Grosz discusses Gen Y:  How They Are Changing Banking at her Moneylicious Blog.

Kay Bell tells us about some Happy Halloween tax breaks! at Don’t Mess With Taxes.

Learn about 5 Employer Benefits You Might Be Missing Out On at MoneyNing.

J.P. answers the question Can You Trade If The Stock Market Closes? at Novel Investor. 

Posts from Fellow NAPFA members

Carolyn McClanahan wrote Navigating Medicare Multiple Choice And A Case Against Vouchers at forbes.com.

Don Martin asks Which Are Riskier – Bonds Or Stocks? at Figuide.com.

Other articles from around the web

Chris Gay asks Is Asset Management Just a Glorified Lottery? at usnews.com.

Quentin Fotrell tells us about George Lucas’ Jedi estate planning at marketwatch.com.

Glenn Ruffenach writes that Health coverage shrinks for young retirees at marketwatch.com.

In case you missed it here is my latest post for the US News Smarter Investor Blog Nearing Retirement? 5 Must-Do Steps. 

Here’s wishing everyone a great weekend.  

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