How should wrap fee accounts be treated under GIPS composite reporting?

Question

AcadiFi · Accepted Answer

Wrap fee accounts present unique GIPS challenges because the bundled fee structure makes it difficult to isolate investment management fees from other costs.

## What Is a Wrap Fee?

A wrap fee is a single, all-inclusive fee covering investment management, trading commissions, and custody. Typical wrap fees range from 1.0% to 3.0% of assets under management.

## GIPS Treatment

**Key rules for wrap fee composites:**

1. Wrap fee portfolios following a specific strategy **should be grouped into a separate composite** from non-wrap portfolios following the same strategy, OR the firm may include them in the same composite but must present wrap-fee-specific performance.

2. Returns must be presented **net of the entire wrap fee** — you cannot strip out only the management portion.

3. The firm must disclose the **wrap fee percentage** and what it includes.

4. If a wrap fee sponsor (the platform/bank) claims compliance, the sponsor is considered the "firm" for GIPS purposes.

## Why Separate Composites?

Wrap fees are typically much higher than standalone management fees. Mixing wrap and non-wrap accounts in the same composite would create misleading net-of-fee returns.

**Example — Oakmont Wealth Advisors:**

| Account Type | Gross Return | Fee | Net Return |
|---|---|---|---|
| Direct client (non-wrap) | 9.5% | 0.75% mgmt | 8.75% |
| Wrap fee client | 9.5% | 2.25% wrap | 7.25% |

If combined in one composite, the blended net return would misrepresent both groups.

## Presentation Requirements

- Present composite returns net of the entire wrap fee
- Disclose the percentage of composite assets that are wrap accounts
- Describe the wrap fee arrangement in composite disclosures
- If gross-of-fee returns are shown, clearly label them

**Exam tip:** The key testable point is that wrap fee accounts must present net returns inclusive of the full wrap fee, not just the management component.

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How should wrap fee accounts be treated under GIPS composite reporting?

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