Financial advisors can help their investors receive value by utilizing an actively traded strategy with covered calls in a WRAP account.
In simple terms, a WRAP account consists of a product with multiple services where the management, trading and administrative fees are all wrapped into one.
With a WRAP account also known as managed money account, an investor benefits from having one fee applied, while receiving ongoing support and consultation from the financial advisor.
Is a WRAP Account Right For Your Clients?
We have all heard or read a story on how WRAP accounts can be bad for clients and how they can be used to generate higher fees for advisors. For instance, an investor that doesn’t trade very often holds a basket of mutual funds and a couple of stocks and bonds is put into a WRAP account. You hear cases that this was allegedly done so the advisor could generate more in fees than what would have been the case if these assets were placed in a traditional commissioned based brokerage account. This type of behavior by advisors is situational and certainly can be made into a valid argument. Clients should question advisors why they are being placed in a WRAP vehicle for the type of investment strategy they are putting their assets into.
What Would You Do?
In the case listed above, we would certainly agree that the advisor that engages in this type of practice should definitely rethink what their objectives are. At CWP, we see WRAP accounts as a fit vehicle for our investment strategy because of the number of times we trade on an annual basis. Some would make the argument that investors would be better off in a buy and hold strategy that consist of very little trading, avoiding as much in trading commissions as possible. We argue that when writing covered calls against the 20 underlying positions in the portfolio on a monthly basis to generate additional income, that doing this in a WRAP account can be very advantageous and offer a competitive total return based on the amount of risk that is being taken.
Significant Savings Over Time
At Capital Wealth Planning, our strategy trades close to 400x a year annually, choosing a WRAP account for your actively managed strategy with covered calls, can be a more appropriate vehicle than having an account that trades only 10-15x per year.
The difference can be substantial for a portfolio over time. Since there will not be any high commissions due to active trading, the savings over a 20 to 30-year time period can be significant. This price differential can be very appealing to your client as an effective investment vehicle.