What Is a Mutual Fund Wrap?

With a mutual fund wrap account, your money will be managed by a professional portfolio manager, who will select different funds based on your investment goals and the manager's investing strategy. The manager can move the money around into different funds to take advantage of hot sectors in the market or hot mutual fund managers. In most cases, the money manager is not your financial adviser or broker. That person -- your adviser -- makes recommendations or helps you select the manager who will be handling your investments.

With a wrap investment account, you do pay loads or commissions neither on each investment nor on a per-trade basis. Instead, you pay an annual wrap fee based on the amount of assets you have under management. The fee can be as high as 2 percent annually for an investment of less than $100,000, but lower for larger amounts. If, for example, you put $1 million into a wrap account, the fee will be around 1 percent. The mutual funds selected to go into your wrap account will have their own annual expenses, which you must pay in addition to the wrap fee.

With a mutual fund wrap account, you have investment access to potentially thousands of different funds without paying any sales loads. Your money will be managed by a professional manager whose job it is to select investments -- not sell products. The money manager will have a strategy or model that is designed to maximize your investment performance. With a wrap account, your broker's income is more aligned with your investment results. The broker will receive a portion of your annual wrap fee, and if your investments grow in value so will his compensation as your investment adviser.

Adding a wrap fee of 1 percent to 2 percent on top of a mutual fund portfolio can more than double the annual expenses of the funds. The manager of the wrap account must be able to produce additional value above average mutual fund returns to justify the the added wrap fee costs. With larger amounts to invest -- more than $500,000 -- the one-time sales charge percentage for load mutual funds drops to a level similar to an annual wrap fee. Your investment adviser should demonstrate why going with the wrap account is a better alternative than buying high-quality load mutual funds that she could sell you instead of the wrap account.