What is a Wrap Account?

Q. What is a Wrap Account and what are the advantages of having one?

Josie’s Answer - Sometimes Wrap accounts are also known as master trusts. Basically they are an “administration service” that allows you and other investors to pool your money, so that you can access managed funds at wholesale prices.

For example, the investment management fee for the average retail managed fund is approximately 2%, whereas the average for wrap accounts tends to be 0.5 – 1.5%.

The cost depends on what the fund manager wants to charge (some think they are better than others! But are they?).

The big advantage of a wrap or master trust is that you can select a wide range of investments (managed funds and direct shares) and the reporting on your entire portfolio is done for you.

For example, if you like buying and selling individual shares and managed funds, it is nightmare at the end of the tax year to work out capital gains and losses (and don’t forget all the dividends received through the year as well).

Everything transaction is recorded and at the end of the year, they will give you a tax statement and you simply hand it to your accountant. Sounds great, but there is no such thing as free lunch! You might save on the investment fees that are charged by the Fund Manager; however wrap and master trust services usually charge a percentage administration fee.

From my experience, the total cost of the service would probably be approximately 2%pa (it all depends on how much you have invested).

On top of this, if you are using a financial planner, he/she may add another 1% which all affects your after tax, inflation and fees investment return (for your info, I do not like financial planning fees to be charged as a % of assets – basically a commission by another name!).

The main disadvantage is the cost - quite a few people have their fingers in the pie - owner of the wrap, fund manager and adviser.   Make sure you calculate your net return i.e. after tax and fees.

Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs.