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What is the definition of a wrap-fee program?

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Rule 204-3(g)(4) defines wrap fee program to be a “program under which any client is charged a specified fee or fees not based directly on transactions in a client’s account for investment advisory services (which may include portfolio management or advice concerning the selection of other advisers) and execution of client transactions.” (Italics have been added for emphasis.)

Under a typical wrap-fee program, a client will pay the sponsor a single fee (typically no more than 2.5% of the client’s total assets held within the account or under management) for management, brokerage, custody and other services provided under the program.

The key to understanding whether any one of your advisory services is a wrap-fee program is to analyze the brokerage fees charged to the client. If clients are charged for execution services based on a percentage of the overall client assets being managed, the program should likely be considered a wrap-fee program. If clients are provided advisory services, but are charged advisory fees along with transaction-based commissions, the program is likely not a wrap-fee program. In fact, the SEC has specifically stated that when transaction fees are charged to clients separately from the overall management fee charged to the client, such an arrangement is not a wrap-fee program. These types of programs have been referred to by the SEC as managed account programs and mutual fund asset allocation programs.

Other parties may also receive a portion of the client’s overall management fee. For example, a program can allow the portfolio manager to select one or more other money managers. Each money manager selected for the client receives a portion of the client’s fee for managing a portion of the client’s assets. Another example involves the ability for outside or unaffiliated registered investment advisers to act as portfolio managers or solicitors of the program. Under these arrangements, the outside registered investment adviser also receives a portion of the client’s overall management fee.

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