In a Forbes cover story this past week, the magazine profiled the devastating losses sustained by one of our clients in a wrap fee account. The entire article can be viewed at the link below. Wrap fee accounts at brokerage firms like Wells Fargo, Morgan Stanley Smith Barney, Robert Baird, William Blair and Securities America have skyrocketed in the last decade.
Unfortunately, financial advisors tend to jam clients into wrap fee accounts who are buy and hold investors and therefore not profitable. Often, the wrap accounts are nothing more than a fee grab by unscrupulous stockbrokers and financial advisors. If a client is buying and holding stocks or bonds (what virtually every client should do) it is extremely frustrating for the broker and brokerage firm.
This is an unprofitable client and for a branch office manager to look at a $500,000 account and the couple hundred dollars the account may spit out in fees and commissions is extremely frustrating. The solution? A wrap account!
The broker typically pitches the client a line of BS about wanting to be on the same page with the client or wanting to align the client and advisor's interests. There is talk about how the fee based account will allow the broker to closely monitor the account and maximize value.
What the advisor is really saying is that both him and his firm are frustrated at earning so little on the account. The fee based account means the client will be charged 1%-2% a year which now all of a sudden annuitizes the fees and commissions. The longtime unprofitable client who is doing exactly what he or she should be doing (buying and holding and keeping fees and expenses low) is now profitable to the brokerage firm.
The "allingment" of interests is broker double speak for making the client profitable. Plus, since the wrap account usually pay greater sums for clients to be in equities instead of fixed income, the wrap fee clients usually have most, if not all, of their account in stocks regardless of age, net worth or actual investment objectives. This is especially problematic with elderly or retired clients or clients nearing retirement as they typically cannot withstand the volatility associated with equities.
We have seen a large surge of fee based, wrap account abuses at major U.S. brokerage firms. We have filed FINRA arbitration claims or lawsuits against brokerage firms like William Blair, Merrill Lynch, Wachovia, Ameriprise and Wachovia (now Wells Fargo) for claims related to fraud, unsuitable investment recommendations and other similar claims for the devastating losses that have resulted from the broker jamming his unsuspecting clients into wrap or fee based accounts and then concernting an improper amount of the client's account into the higher paying equities. It is a major problem for investors and is only going to grow worse as brokerage firms recommend fee based accounts to more clients.
For the entire article in Forbes detailing the investment losses our elderly client sustained in a wrap fee account, please see the link below.