By Conrad de Aenlle

Published: May 9, 1992

THE idea behind the wrap account — a growing phenomenon in personal money management — is simple and attractive: your asset management worries taken care of for a single fee. When you buy a wrap account the brokerage will provide asset management expertise and order executions in a single package. Wrap fees are popular enough, but do they work? Are they good value, compared with the alternatives on offer?

Some in the investment industry — mainly brokerages — think wrap fees are fine, in that they eliminate the potential conflict of interest inherent in a system that rewards brokers not for performance, but for buying and selling securities, regardless of the result.

Others, however, point out that no-load mutual funds already combine the two functions of a wrap account, and for a mere 1 to 1.5 percent of assets. And some of the more cynical opponents of the accounts note that by stressing the reduced potential for conflict, brokers are merely assuring investors that they won’t be victimized by the kinds of disreputable practices the firms have been accused of engaging in for decades.

A wrap account typically begins with a client articulating his needs and objectives to a broker. The broker then finds an appropriate money manager among those associated with the firm. After the account is set up, the broker keeps an eye on the manager and the client’s assets to ensure the suitability of investment decisions. In some accounts, the broker acts as the money manager, as well.

The fees vary, depending on the amount of assets under management and the types of investments made. An account of $100,000 in which primarily equities are traded might cost the holder 3 percent of assets per year. The more assets in the account, the smaller the percentage. In accounts holding mainly bonds, the annual fee might be 1 or 1.25 percent.

The recognized leader in the field is Shearson Lehman Brothers, which has more than 60,000 clients in wrap accounts with total assets of $13 billion. The minimum investment for an account is $100,000 with a fee of 3 percent, although that is negotiable, said John Karoussos, senior vice president of Shearson’s Consulting Services Division.

Under the program, the Shearson consultants who drum up the business get part of the fee, and Shearson pays all the administrative expenses of running the accounts, Mr. Karoussos said. The managers, who are not Shearson employees, are free to execute trades with whichever brokerage gives them the best deal, he added.

While wrap accounts have the benefit of active management, some in the industry argue that the same services can be had for less.

Look at the alternatives — solid mutual funds with long-term track records, said Carol J. Boltz, a financial planner and director of brokerage services at Crestar Bank in Washington. You’ve got the same benefits — diversification, professional management. and a prospectus stating all the fees. If you buy an allocation fund, you’ve just achieved the same thing for less money.

She was referring to funds such as the no-load Fidelity Asset Manager that allocate shareholders’ money among stocks, bonds and cash equivalents. Other no-load fund groups, such as Vanguard and T. Rowe Price, have funds in which managers allocate clients’ holdings at very low cost among other funds in their families with varying objectives.

The annual wrap fees — almost always 3 percent or less — don’t sound like much, but they add up.

To understand the impact of fees on an investment, it may be best to think of them as a percentage of the return, not of assets. Brian Mattes, a spokesman for Vanguard Group, noted that if an investor can make 10 percent on his money per year — not bad — a wrap fee of 3 percent is nearly a third of the gain — not good.

How do clients with wrap accounts fare, compared with the averages and with funds?

A trade publication called Stanger’s Investment Advisor compared the performance of a hypothetical wrap manager able to match the Standard & Poor’s 500 index with that of Vanguard’s S&P 500 index fund, the industry’s largest.

After one year, a $10,000 investment returns nearly $300 more with the index fund after a 3 percent fee is factored in for the wrap account. After 10 years, the index fund comes out $9,000 ahead.

A second Stanger’s study found a group of 70 wrap managers beating a collection of no-load equity funds, but the managers were an elite bunch chosen for their superior performance, and so it was a biased test, the report noted.

Wrap account providers say there is more to their products than performance. They stress the personalized nature of the service.

The actual investment process for the majority of the people stinks, asserted Len Reinhart, director of the Shearson Consulting Services Division. They do it piecemeal, they’re sold things, they have no way to track their performance.

If you don’t want to buy the process, you’re better off [making investment decisions] yourself, he added. But if you do want to buy it, it costs money. If the client can go out and find and buy their own money manager, it is more expensive than a mutual fund.

A new Shearson program combines the two. A manager will switch assets in and out of no-load funds depending on a client’s objectives for an annual fee of 1.5 percent of assets, plus the usual expenses of the individual funds.

Mr. Reinhart, by the way, has nothing against iconoclastic types who want to make their own investment selections.

If you have the time and ability to do it yourself, you can do it cheaper, he said. More power to them, they don’t need my services.

In either case, the trend in wrap accounts is toward lower fees, industry observers note. That’s likely to continue now that some fund companies and the discount brokerage Charles Schwab & Co. are entering the field or planning to.

Currently the wrap accounts with full-commission brokers are running 3 percent of a $100,000 account, said Tom Taggart, a Schwab spokesman. We think that’s pretty high and we can undercut that.