How does GIPS handle wrap fee and separately managed accounts (SMAs)?

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AcadiFi · Accepted Answer

Wrap fee accounts bundle management fees, trading costs, custody, and sometimes performance fees into a single asset-based charge paid by the client (typically 1.5-3% of assets). GIPS has specific provisions because the underlying components can't be easily separated.

KEY GIPS REQUIREMENTS FOR WRAP ACCOUNTS:

1) Wrap accounts must be included in wrap fee composites — they can't just be lumped with regular SMAs.

2) PURE GROSS returns (before any wrap fees) AND NET returns (after full wrap fee) may both be presented, but both must be clearly labeled. Pure gross returns are theoretical and must be marked as 'supplemental information.'

3) The NET return must reflect the TOTAL wrap fee paid (typically higher than a traditional management fee).

4) When a firm is a SUB-ADVISOR in a wrap program and receives only part of the bundled fee, both gross and net returns require careful disclosure of fee components.

5) Wrap fees include trading costs, so firms should NOT deduct trading costs separately when calculating pure gross returns in a wrap context (to avoid double counting).

6) Composite disclosure must specify:
   - Whether returns are before or after wrap fees
   - Highest applicable wrap fee
   - Fee schedule of the wrap sponsor if known

At Foxglen Wealth Management, the Core Growth Wrap Composite shows a 8.4% gross return (supplemental) and 6.6% net return after the 1.8% wrap fee. The firm discloses that it is the sub-advisor and receives 65 bps of the 180 bp wrap fee.

For CFA Level III, remember: wrap fees complicate gross/net distinction, pure gross is supplemental only, and wrap composites must be separately constructed.

How does GIPS handle wrap fee and separately managed accounts (SMAs)?

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