Wrap fees are interesting in many ways.
For a business, such as Morgan Stanley, they charge a wrap fee. This means that attach a percentage fee to all the assets a customer has with them. This generally means MS gets an “annuity” like payment from their customers who are not getting an annuity payment but RISKING their assets.
This reminds me of the Fisher Investments commercial where they say “We make money when our customers make money.” This is true, but they also make money when the customer loses money. The prices of assets go down, Fisher still takes their “cut”! They conveniently don’t say what happens when the asset values go down.
The nature of brokers is that they are like fisherman always trying to land a bigger fish. Each “fish” represents an annuity “stream” that regularly goes into their pocket. The more fish they get, the more “streams” they get. It is also human nature to want to get more and more fish, but they only have so much time, so they go after bigger and bigger fish. The bigger fish provide better “streams”, so after awhile the little fish stop getting their attention.
Does anyone pay their doctor a regular percentage of their earnings because he or she keeps them healthy? Should we pay a mortgage broker a monthly percentage of our home’s value because they helped us set up financing for the home? This is laughable! The broker might argue that they should get paid continuously because they “manage” the portfolio. But the nature of the brokers business is to constantly be fishing for more accounts. Managing accounts isn’t their core competency. Sales is. Therefore, they are incentivized to do as least as possible once the “fish is caught” as long as that “annuity” stream doesn’t swim away.
Finally, people literally hate wealth taxes. Wealth taxes are far more caustic than income tax. This is because the tax is applied to people’s asset base year after year no matter if the person has any income or not. At least an income tax only takes a percentage of the income earned in a year and the “earner” has the after-tax amount. A small one percent wealth tax can eat up a person’s assets quickly over time. Now consider this, a wrap fee has the same effect as a wealth tax! Think about it.
If I needed help with someone managing my assets, I would seek out a fee-based planner that I would pay by the hour. Maybe I would see them each quarter to review my portfolio and advise me on what I should be doing. It might cost me a hefty amount per hour, but, all in all, it would be way less than a wealth tax. Excuse me, I mean a wrap fee. Also, the fee-based advisor has to work to get paid. They are not incentivized to get more clients and ignore their captured fish.
Be smart, be well-read, be aware and be successful.
“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”
-Warren Buffett
