Total assets in wrap fee programs - in which investors pay a fee based on assets to invest across various securities - grew to nearly $117 billion as of the end of 1994, according to a report soon to be released by Cerulli Associates Inc., Boston.
Consultant wrap fee program assets totaled $104.4 billion, while mutual fund wrap fee program assets totaled $12.4 billion. Growth in consultant wrap fee programs declined 2%, while mutual fund wrap fee programs took off in 1994, increasing 48%. At year end, mutual fund wrap accounts represented 11% of total wrap assets, up from just 4% in 1992.
Among the standouts in terms of asset growth: Merrill Lynch's Mutual Fund Advisors program saw its assets increase to $500 million from $52 million in 1994; Fidelity's Portfolio Advisory Service doubled to $2.4 billion; LPL Financial Services' Strategic Asset Manager program, with 900 no-load or load-waived funds, increased 50% to $1.5 billion; and market leader Smith Barney's TRAK program reached $3.4 billion, a rise of 21%.
Traditional dominance of the market by wirehouse firms is eroding as mutual fund companies, bank trust departments and regional brokerage firms are capturing market share. In fact, Smith Barney and Merrill Lynch, the top two sponsors, actually saw slight declines in assets in 1994.
"Fidelity, SEI and Federated Investors are among the firms providing platforms to community banks for offering mutual fund wrap accounts," the report said. Fidelity brought in $700 million from other institutions in 1994, led by bank trust departments.
In addition to Smith Barney and Merrill Lynch, the other top sponsors are: Prudential Securities, PaineWebber and Dean Witter. The five firms represent 87% of wrap assets. But that's down from 91% in 1992.
Although a few large firms dominate distribution, no one money management firm runs more than 3% of total assets held in consultant wrap accounts. The vast majority of assets - 72% - are in equities. The rest are in fixed income and money market securities.
Wrap features also are spilling over into 401(k) plans and variable annuities. The three types of wrap-related products in the 401(k) market are Smith Barney's broker-sold TRAK product, which has signed on 300 plans with more than $500 million in assets; the SteinRoe Retirement Counselor; and the Principal's wrap service within its group variable annuity contract designed for 401(k) plans. Prudential Securities has petitioned the Department of Labor to expand its Target product, a mutual fund wrap account, to the 401(k) market.
The popularity of mutual fund wraps is among the factors that has exerted downward pressure on consultant wrap fees. The average fee for consultant wrap programs is about 2.3%. At the end of 1993, it was about 3%, the report said. Average fees charged by mutual fund wrap sponsors remained at 1.25% to 1.5% during 1994. But that does not include the mutual fund expenses, which range from 0.50% for bond funds to 1% or more for stock funds.
"Investors will pay much less if they invest in mutual fund wrap accounts which choose funds from low-expense mutual fund families such as Vanguard or Scudder," the report said.
Despite fee pressures, the business remains attractive for its stability. Mutual fund wrap programs, for instance, experience lower redemptions than individual mutual funds and the average account size is substantially larger, ranging from $44,000 to $150,000 depending on the sponsoring firm. The average consultant wrap account size has remained $250,000 to $300,000.
The report surveyed more than 100 mutual fund companies, brokerage houses, insurance companies, banks, money managers, financial planners and third-party service providers.