Asset Managers Stand To Lose As ‘Wrap Accounts’ Send Velocity Of Money

With more and more investors seeking to reduce their cost of investing, traditional ‘load’ accounts, which impose a fee every time the investor makes a trade, are losing popularity compared to ‘wrap’ accounts.

Asset Managers Stand To Lose As 'Wrap Accounts' Send Velocity Of Money

A ‘wrap’ account is an arrangement whereby the investor pays a one-time fee (instead of recurring trading commissions) that ‘wraps’ up all the accounts being managed by the advisor or broker, and covers all transaction costs for those accounts.

ETFs and wrap accounts

Advisors can now package the highly popular ETFs, which can be combined and structured to provide practically any kind of exposure, with wrap accounts to offer a highly cost-effective route into the markets to investors.

According to an article in MainSt, a survey by Market Strategies International reveals that 23% of fee-based financial consultants expect to increase their use of ETF advisory/wrap accounts – a rate three times greater than advisors who plan to increase their use of mutual fund advisory/wrap accounts (7%). “The proliferation of ETF products and investment strategies make building a managed solution around these products quite attractive to advisors, especially as they become more comfortable with ETFs in general,” says Meredith Lloyd Rice, senior product director and author of the study in the article. “However, in today’s fee conscious environment, advisors and providers alike will have to monitor the ‘all-in’ ETF wrap account cost given a penchant for lower expenses among advisors and investors.”

How wrap accounts affect the velocity of money

Amrit Kanwal, CFO, Massachussetts Financial Services, the Boston-based money manager with $386B in assets, said at the company’s investor day held Wednesday that wrap accounts have changed, and will continue to change, the asset management business.

“MFS on the future of money management,” a research report by RBC Capital Markets, authored by analysts Eric N Berg, Bulent Ozcan and Kenneth S Lee, highlights the top three issues discussed at the MFS investor day, one of them being the velocity of money.

“The velocity of money has picked up in a way that has changed the money management business profoundly and permanently,” says the study. “Because fewer customers than ever are involved with so-called “load” funds, for which there is a financial cost to the customer for frequent trading, and because more customers than ever are involved with these wrap arrangements for which exiting funds has no cost, asset managers such as MFS can expect the movement of money to pick up,” says Kanwal in the study.

Implication for asset managers

With no cost inhibitions to hinder exits, investors could trade-in and trade-out much more frequently, pushing up the velocity of funds in the hands of advisors and brokers. The implication for asset managers: advisors and their customers will rotate out of their funds at the drop of a hat in the event of returns not measuring up.

The new reality is, therefore, that fund managers must contend with fickle and not-so-loyal investors. That puts asset managers, such as MFS, who have a long-term investment horizon in their portfolios, at a disadvantage. How will they cope?

MFS, for one, is “hoping that by having a steady hand at the investment tiller, and by pairing this strong investment performance with a heavy advertising and branding campaign and with improved customer service, it can enjoy increased advisor loyalty,” says the RBC report.