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Wrap It Up

With a new rule that holds brokers to the same standards as financial planners, the wrap-account romance may be coming to an end.

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This story appears in the September 2007 issue of Entrepreneur. Subscribe »

Brokerages love wrap accounts, which explains the emphasis they've put on them in recent years. And that, in turn, explains the $300 billion-plus that had settled into wraps by early this year. Wraps are accounts that take a set fee--typically 1 percent to 3 percent of your assets--each year in exchange for an unlimited number of trades and occasional advice from your . But this spring, the Financial Planning Association, whose members are held to a higher standard of care than most brokers, spoiled the brokerage party. The association brought a federal case against the that, starting this month, changes the rules of the game. Brokers with wrap-account clients will now have to meet the same fiduciary responsibility as financial planners, which means brokerages won't love wrap accounts nearly as much. So odds are good that yours has already started trying to talk you into some other type of account.

Wrap accounts have advantages if you trade quite a bit and don't need a lot of hand-holding. If that definition fits you, you might want to stay with the closest alternative to a wrap. At most brokerages, that comes in the form of a nondiscretionary advisory account, which charges you a single fee based on the level of your assets and offers advice when needed. The advice-givers, unlike in the old wrap accounts, will assume a fiduciary responsibility for your welfare, and they'll have to check with you before making a trade--so don't be surprised if it costs you a bit more.

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