In February I posted an article titled Wrap Accounts & Mutual Funds where I took the time to outline the basic function of wrap accounts (or managed accounts) that are offered by many Canadian banks and mutual fund companies. A basic wrap fund is a fund of funds that charges higher fees (MER), offers less individual choice and increases profitability for the companies who supply them.
After generating a number of hits off Google search and a few emails asking more specific questions, I decided to look a little more in-depth into this fund category to determine just how profitable they are for the companies who offer them and what share wraps constitute compared to the past few years.
What I first did was examine the top 15 funds (by total assets) for the five Canadian banks to assess the number of wrap offerings. I then focused back on an article by Rob Carrick in 2004 and compared the growth of assets in the funds mentioned and the changes in MER’s. Finally I calculated the overall fees generated by the top 15 funds for each company and what percentage of revenues the collective wrap funds accounted for.
I’ll first outline what I found from the Carrick article when I compared his findings in 2004 to those recently stated by Morningstar.ca to date in 2008. The article, titled Bank-sold wrap accounts don’t live up to sales pitch, discusses wrap offerings from CIBC, RBC, BNS, TD and BMO. Unfortunately specific information on BMO’s MatchMaker wraps aren’t made public by the company so total assets and MER remains unknown (how convenient!!!). The findings were stunning and confirmed what I anticipated before I began to crunch the numbers.
Wrap accounts are very profitable product offerings for fund companies because instead of managing a group of individual funds within a customer’s portfolio, a wrap is designed to offer a pre-determined grouping of funds already. It charges a higher overall MER for “professional management” beyond the average MER of its individual funds and gives its’ customers one single fund to monitor. Over the past four years the MER’s have decreased anywhere from 3.3%-0.2%, but the trend for assets under management has been up…WAY UP!. While only one fund dropped (by 12.7% for RBC Select Choices Balanced) others were rising by a whopping amount (622.7% for Scotia Select Balanced Income & Growth).
The trend observed is startly as fund companies continue their concentration on these product offerings for the higher fees, ease in management (decreased cost) and ability to sell on a much larger scale than individualized plans to fund customers. When I calculated the percentage revenues from wraps of the top 15 funds for each banks I found the following:
BNS: 40.8% of overall fees
TD: 39.1% of overall fees
RBC: 17.2% of overall fees
CIBC: 10.2% of overall fees
For BNS and TD there is an obvious disparty that is established by these numbers against their competitors and illustrates a more concentrated focus on wrap fund offerings to fund customers. The shock factor comes when you look through the top 15 holdings of TD and notice that nearly 40% of revenues come from wraps in a grouping dominated by its TD Canadian Bond ($8.6B total assets) and TD Monthly Income ($4.6B total assets) funds that compromise 25% of total fund assets in the top 15.
When you examine the performance of each wrap against their respective benchmark and category peers another trend is quickly established. In the case of wrap accounts; you clearly don’t get what you pay for.