Schwab Unveils Wrap Accounts

Like Ikea furniture, a good portfolio of mutual funds takes some effort to assemble. You find superior funds, buy their shares, monitor performance, and rebalance at least once a year. Too much work? For some people, yes. That explains why $346 billion is invested in mutual fund "wrap" accounts. Pros make the picks and do the other work for you. But the cost of brokerage-run fund wraps is high, averaging 1.17% annually (not counting the expenses of the underlying funds) -- not very attractive to cost-conscious investors.

Now comes broker Charles Schwab Co. to undercut the competition. The annual fees of its Schwab Managed Portfolios, launched in August, top out at 0.50% with a $50,000 investment and fall to half that if you invest more than $500,000. Schwab is offering eight portfolios, consisting of its own funds and those managed by other firms, with various levels of risk.

Schwab's pricing is aggressive. Fidelity, which has been in the fund-wrap business since 1989 and offers more than 50 different fund portfolios, charges 1.10% on accounts of $50,000. The fee descends to 0.25% if you have more than $2 million in assets. Discounter TD Ameritrade says it plans to start a wrap program that will charge 0.85% on a $50,000 investment, then drop to 0.65% on accounts of more than $100,000. Its five portfolios will contain only exchange-traded funds.

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Costs add up

Wrap fees don't include costs incurred by the funds within the portfolios. Add those, and total costs in traditional wrap accounts can hit 2.50%, according to Cerulli Associates. Total costs for Schwab's portfolios range from 1.20% to 1.45%.

Representatives from wrap sponsors usually consult with clients once a year to discuss portfolio changes, but their advice is typically limited to the money in the account. You have to go elsewhere for guidance on insurance, estate planning and the like.

Try a fee-only financial planner for more-comprehensive advice. On average, independent planners charge 0.76% of assets, according to Tiburon Strategic Advisors research. Just as with fund-wrap accounts, advisers layer their fees on top of the expenses of the funds they select. Unless the adviser uses only low-cost funds, the total annual fees of such a program can easily reach 2%.

Life-cycle alternative

Target-retirement funds are a better choice than wrap accounts if you want professionals to manage your asset allocation but don't want to pay extra for their advice. Such funds, also known as life-cycle funds, shift your asset mix automatically over time, becoming more conservative as the target date -- usually the year you retire -- approaches. Good target-date funds, such as those that make up T. Rowe Price's Retirement funds, charge less than 1% annually. And that fee includes everything.