Wrap Fee / SMA

Reading 48 - CFAI text Vol 6, P293 & P332~334 I just do not understand what is Wrap Fee / SMA. Is it a kind of expense (fee) or an account or a portfolio ?

A wrap fee is when a broker charges you a flat fee, like say 1.5% of AUM, for a bundle of services (hence the term wrap). It includes investment advice, transaction costs, etc. SMA in this context is a separate managed account.

Think of an advisor that offers both mutual funds and SMA . The SMA could be managed to similar style as the mutual fund , but with either some additional restrictions or preferences . By and large the client would get similar results , but could pay a single fee that wraps everything . If the advisor 's operation is efficient , they could make more . Either case the client gets charged a contracted fee .

a SMA is a separately managed account. In that account you own the actual stocks vs if you own a MF you own a share in the fund.

wrap fee = bundled fee (in essence), although they have different terms. Am I right ?

AMA Wrote: ------------------------------------------------------- > wrap fee = bundled fee (in essence), although they > have different terms. Am I right ? Yes. Wrap fee will not disclose how much it charges for each service while a bundled fee will.

idreesz Wrote: ------------------------------------------------------- > AMA Wrote: > -------------------------------------------------- > ----- > > wrap fee = bundled fee (in essence), although > they > > have different terms. Am I right ? > > Yes. Wrap fee will not disclose how much it > charges for each service while a bundled fee will. Thank you so much !

What or who is the WRAP FEE/SMA sponsor ? Frankly speaking, how many parties are there? Seems there are three parties: Firm, Wrap Fee Sponsor and Client.

Sorry, I come back here as I am much more confused by those statements on P.332~334 of CFAI text V6. It seems there are 4 parties involved : Client / Advisor / Sub-advisor /Sponsor. What are the roles they are playing concerning Wrap Fee or SMA ? Furthermore, I don’t understand what are “style-defined” composites and “sponsor-specific” Wrap fee / SMA composites ? Can anyone advise clearly ?

Client contracts with advisor within a sponsoring fund, but requests certain special or separate treatment / mandate , e.g no Tobacco and no African Energy stocks please , advisor turns around to sub-advisor for certain portion of the investment to be executed . Sub advisor runs a mutual fund with similar objectives and strategy but allows SMA accounts as well with special treatment . Only way they will do it if client agrees to bundled fees , so charges can be rolled up , such as research/trading costs/ soft dollars etc, everything except the investment management fee , which they can provide separately

janakisri, Thank you for your response ! Now I have a better understanding. But, Is the sponsor the advisor ? what are “style-defined” composites and “sponsor-specific” Wrap fee / SMA composites ? Am I overthinking ? We don’t need to know ?

Usually Sponsor is same as Advisor , but for example for a Pension Benefit program , the Sponsor could be a separately formed entity that creates and manages overall the different facets of administering the program. For a SMA , a Sponsor could be a Wealth Management firm ( part of a bank for instance ) that is distinct from the main advisor who manages investments on behalf of the client. The Advisor turns to a Sub-Advisor for some parts of the allocation where the Sub-Advisor has a specific program that the Advisor needs to complete the portfolio.

So many questions to ask on this WRAP FEE/SMA portfolios. 1, “WRAP FEE Sponsor” = the fund sponsor? 2, Schweser notes(B5/P222) three parties: account owners, the sponsor, and the investment management firm(=sub-advisor, or advisor?). It seems that the advisor needs to win business from the sponsor. 3, The difference between"style-defined" composite and “sponsor-specific” composite. - The “style-defined” composite, which includes all actual wrap fee/SMA portfolios, is for all prospective clients. - The “sponsor-specific” composite is presented to an existing client to win additional business. It’s required to disclose the name of the wrap fee/SMA sponsor – don’t know why. 4, According to GIPS, “Two examples of BUNDLED FEES are WRAP FEES and ALL-IN FEES.” The firm’s[advisor’s] performance must be presented net of entire wrap fee. So why not just call Bundled Fees?

1, “WRAP FEE Sponsor” = “wrap fee/SMA client” = the fund sponsor?

Bump. Feel like I got a decent handle on GIPS except for the Wrap Fee. Can anyone answer Deriv’s above questions?

After a Google Search I found this: http://www.morganlewis.com/pubs/stevestone_presentation_wrapfeeprogs.pdf Excerpts: Wrap fee programs are arrangements between broker-dealers, investment advisers, banks and other financial institutions (typically acting as sponsors of the programs) and affiliated and unaffiliated investment advisers (or portfolio managers) through which the customers of such firms receive discretionary investment advisory, execution, clearing, and custodial services in a “bundled” form. In exchange for these “bundled” services, customers pay an all-inclusive – or “wrap” – fee determined as a percentage of the assets held in the wrap fee account. Clearly the bank or retirement fund organization acts as sponsor while the portfolio manager that manages the investments charges the client a wrap fee

In the text, no clear explanations / definitions of some terms. Without understanding the relationships (who is who & what charges are charged to whom by whom) clearly, I am really confused by this very short section.

Just simplify for yourself : You have a banking relationship and the wealth advisor knows lots of alpha shops . You know nothing of investing and depend on wealth advisor ( i.e. the banking relationship manager) Now The RM does not actually invest anything , he is a pure consultant only . He recommends services of an investment manager who has a good consistent track record of alpha generation. In this particular relationship , the bank ( as represented by the RM) is the sponsor ( as far as the investment manager is considered ) , while the Investment manager acts as the actual fund manager . It would be appropriate to charge the private client a wrap-fee , particularly if the mandate is specific or unusual.In the GIPS world , you would have to reveal the name of the bank upon request , if the SMA is built specifically on their instructions

janakisri, What is The RM ?

relationship manager