Wrap fee programs remain squarely in the Securities and Exchange Commission’s sites, as evidenced this week by a new investor bulletin that lays out all the questions investors should be asking advisors who recommend wrap fee accounts.
The bulletin, “Investment Adviser Sponsored Wrap Fee Programs,” not only asks investors to dissect any and all fees they may be charged in a wrap fee plan and disclosures they should receive, it cites the specifics of five different administrative proceedings the SEC has brought against investment advisors for failing to disclose additional fees.
Pulling no punches, the SEC also names the firms it’s gone after since 2016, including AIG Affiliates, Raymond James & Associates, Robert W. Baird & Co., Riverfront Investment Group and Stifel, Nicolaus & Co—all of which have settled charges with the SEC without admitting or denying wrongdoing.
Wrap fee account assets are expected to more than double in the next five years to $1.1 trillion, according to Tiburon Strategic Advisors. Still, increased SEC scrutiny has many industry participants carefully weighing the costs and benefits of recommending wrap fee programs to investors.
“I will say this: I have wrap fee accounts available and I haven’t approved any for clients yet,” Buffalo, N.Y.-based Peak Reps LLC co-owner Glenn Wiggle told Financial Advisor. Peak Reps is the holding company for both investment advisor firm Blackridge Asset Management and broker-dealer Peak Brokerage Services. Wriggle is chief compliance officer for both firms.
“Here’s why I haven’t approved any wrap fee accounts yet: In each and every case, the unbundled fees would be cheaper than the wrap fee. It’s something I’m acutely aware of and have monitored very closely because of the SEC’s viewpoint,” Wiggle said.
In his analysis, clients have their needs met and pay less using his firm’s unbundled account and paying individual ticket instead of using a wrap fee program.
The second reason Wiggle said he does extra due diligence on wrap fee accounts is the SEC’s repeated warnings about additional and undisclosed fees. “Wrap fee programs are supposed to be all-inclusive,” Wiggle said. “One SEC concern, and rightfully so, are the wrap fee programs that use third-party managers [where] brokerages incur additional trading costs that are not properly disclosed.”
So far, “based on looking at volume of trading, it has been less expensive for clients to use an unbundled fee schedule rather than a bundled wrap fee program,” Wiggle said. “With the trend toward more advisors moving to fee-based accounts, I think the SEC is doing a pretty good job of accessing these issues and looking out for the investor.”
Is the SEC winning the war on excessive and undisclosed fees?
Stephanie Avakian, co-director of the SEC’s Enforcement Division, has said she wants the division to identify misconduct impacting retail investors. The SEC’s Retail Strategy Task Force was created in September for that purpose, Avakian said.