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Bad Strategies: Why Wrap Accounts, Once Illegal, Still Should Be

Prepaying High Prices for Anything Makes No Sense

When brokers rely on trades for their income, they have a natural tendency to trade too much. Many firms suffered fines and tort damages when their brokers were found to have abused clients through excessive trading. Wrap accounts, whereby clients are charged a fixed amount or a percentage of their assets regardless of the number of trades, were seen as a cure since excessive trading did not benefit brokers. Over time, wrap accounts have led to less service, since an account that sits idle generates the same income as an account of the same size that executes many trades. With wrap accounts, brokers have incentive to gather new clients and ignore current ones

At one point wrap accounts were deemed illegal since many observant clients found that they were paying fees for no identifiable service. The brokerage industry got them to be legal again by claiming that the wrap fees were for money management services. Critically, brokerage firms did not send their reps to business school or anywhere else to retrain. Their lawyers simply conned willing regulators and judges to believe that all their Willie Lomans were actually Warren Buffets. Thus, people with wrap accounts continue to pay a guaranteed minimum charge that can reduce returns by 20, 50 even 100% depending on the mix of stocks, bonds, and cash. All that damage, for inferior service.

How Can Help

Briefly, can do the work that your rep should be doing. You can increase net returns immediately by simply taking the wrap feature off of your account. If your account is at an institution where trading costs more the $10 - $20 per trade, then you can further augment net income by switching to an institutions with low commissions. can help you find an appropriate institution.

Meanwhile, you can fill any gap you may sense by the loss of access to your salesperson (consultant, advisor, whatever the title). can assist you with asset allocation, financial planning, proper investment practices, and education as deep as you want to go.