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The average wrap-around fee for a dedicated stock broker typically ranges from about 1% to 3% of the assets under management (AUM) annually. These fees are comprehensive, covering most of the administrative, management, and operational costs associated with an investment account. The actual percentage can vary based on several factors, including the amount of assets being managed, the specific services included in the wrap program, and the brokerage firm itself.

For larger accounts or for clients with significant investment amounts, the percentage might be on the lower end of that range, as many firms offer tiered pricing based on the size of the account. Conversely, smaller accounts might see relatively higher fees. These wrap-around fees are popular for their simplicity, allowing investors to pay a single fee that covers all management and transaction costs, avoiding the need for separate transaction fees per trade.

It’s important for clients to review the services provided under these fees and evaluate whether the cost is justified by their investment needs and the level of personalized service they receive.

-ChatGPT 4o

Vanguard’s wrap-around fee is .003 compared to the average of .01 to .03. Over the years, the savings would amount to thousands and thousands of dollars.

-Denton Hawk

Denton: Assuming an investment portfolio well-diversified in stocks and bonds, with the initial investment of $1,000,000, compare the savings of a .3% wrap-around fee vs. a 3% wrap-around fee.

ChatGPT 4o: To compare the impact of a 0.3% wrap-around fee versus a 3% wrap-around fee on an investment portfolio, let’s break down the potential effects using a hypothetical initial investment of $1,000,000.

1. Understanding Wrap-Around Fees

Wrap-around fees are typically charged by financial advisors or investment managers to cover various services such as portfolio management, advisory services, and sometimes administrative costs. These fees are often structured as a percentage of the total assets under management (AUM).

• 0.3% Wrap-Around Fee: This means you would pay 0.3% of your total investment annually as a fee for advisory services and management.
• 3% Wrap-Around Fee: This is significantly higher, representing 3% of your total investment annually.

2. Impact on Investment Portfolio

Let’s calculate the annual fees and then compare the cumulative effect over a few years:

• Annual Fee Calculation:
• 0.3% Fee: ( \$1,000,000 \times 0.003 = \$3,000 )
• 3% Fee: ( \$1,000,000 \times 0.03 = \$30,000 )

3. Comparison Over Time

To illustrate the impact, let’s consider the effects over a 10-year period assuming no additional contributions or withdrawals, and an average annual return on investment (ROI) of 7% before fees (which is a common assumption for a diversified portfolio of stocks and bonds).

• Future Value Calculation: After 10 years, the future value ( FV ) of an initial investment ( PV ) can be calculated using the formula: [
  FV = PV \times (1 + r)^n
  ] where:
• ( PV ) is the initial investment ($1,000,000),
• ( r ) is the annual rate of return (7% or 0.07),
• ( n ) is the number of years (10). For simplicity, we’ll subtract the annual wrap-around fee each year from the portfolio value before calculating the return.
• With 0.3% Fee:
  • Annual fee: \$3,000
  • Effective annual return: ( 7\% – 0.3\% = 6.7\% )
• With 3% Fee:
  • Annual fee: \$30,000
  • Effective annual return: ( 7\% – 3\% = 4\% )

4. Calculation Results

Let’s compute the portfolio value after 10 years for both scenarios:

• 0.3% Fee Scenario: [
  FV_{0.3\%} = \$1,000,000 \times (1 + 0.067)^{10} = \$1,000,000 \times 1.96715 = \$1,967,150
  ]
• 3% Fee Scenario: [
  FV_{3\%} = \$1,000,000 \times (1 + 0.04)^{10} = \$1,000,000 \times 1.48024 = \$1,480,240
  ]

5. Comparison of Savings

Now, let’s compare the final portfolio values after 10 years:

• Difference in Final Portfolio Value: [
  \text{Difference} = FV_{0.3\%} – FV_{3\%} = \$1,967,150 – \$1,480,240 = \$486,910
  ]

Conclusion

The difference in savings between a 0.3% wrap-around fee and a 3% wrap-around fee over a 10-year period with an initial investment of $1,000,000 can be significant.

• 0.3% Wrap-Around Fee: After 10 years, the portfolio would grow to approximately \$1,967,150.
• 3% Wrap-Around Fee: After 10 years, the portfolio would grow to approximately \$1,480,240.

Therefore, choosing a lower wrap-around fee (0.3% vs. 3%) can potentially save you \$486,910 over 10 years, assuming all other factors remain constant. This illustrates the importance of considering fees when evaluating investment management services, as higher fees can significantly impact long-term investment returns.