The wrap fee market continues to expand rapidly, according to a study by Cerulli Associates Inc., Boston, and Lipper Analytical Services Inc., New York.
Total assets in wrap programs grew 30% in the year ended Dec. 31, 1995, to $101.6 billion. In two years, total assets in wrap programs grew 50%.
The report found Wall Street wirehouses still dominate the wrap market, but their share is slipping slightly. The wirehouses control 82% of the market, down one percentage point from a year earlier and two percentage points from two years earlier.
Regional broker dealers, banks and financial planning firms all registered growth in 1995, according to the report.
Mutual fund wrap programs continue to gain ground. They account for 19% of the total wrap fee market, up from 11% in 1993 and 15% in 1994. That increase is due in part to mutual funds' lower minimums. The report notes the median mutual fund wrap account size is $92,000, while the median for a consultant wrap account is $245,000.
However, the report notes high expenses may be their eventual undoing. The mutual fund programs have a "two-tier" fee structure, where investors pay the wrap fee and the fund expenses, which together can add up to 3% of assets, or about the same as a consultant wrap programs. That has not been a problem during the recent bull market, but as the market reverts to the mean, those prices could eat up as much as half the clients' gains, according to the report.
Mutual fund programs have been particularly helpful in banks' efforts in the market, according to the report. Assets in bank mutual fund wrap programs grew in 1995, from $495 million at the end of 1994 to $1.3 billion by year-end 1995. The number of banks offering proprietary mutual fund wrap programs jumped to seven from three. At least five other banks plan to launch programs this year, the report noted, including NationsBank, Banc One and First Union.
At the same time, the report identifies a new generation of asset-based wrap hybrids developing among brokerage firms. The fee-based accounts, offered as an alternative to commission-based brokerage accounts, combine individual securities and mutual funds while borrowing some of the features of mutual fund accounts, such as recommended lists of funds and asset allocation models. The largest of those, LPL Financial's Strategic Asset Manager, with $2.6 billion in assets, offers access to individual securities and 900 mutual funds.
IRA rollovers and other retirement assets make up about half the assets in wrap programs. But firms haven't made much progress in attracting pension assets. According to the report, only Smith Barney & Co.'s TRAK program and Prudential Securities' Target program have received permission from the U.S. Department of Labor to market to 401(k) plans; Target has not gathered meaningful 401(k) assets yet and TRAK has brought in $1 billion, according to the report.
The report was based on data collected through interviews with 100 companies including mutual funds, brokerage houses, insurance companies, banks, money managers, financial planners and third-party product providers.