This is a charge that is assessed periodically based upon the current market value of the portfolio/security. A wrap fee is a common type of annual fee charged on wrap accounts. Wrap accounts typically offer a group of services to investors, such as management, advisory, and brokerage services, for a regularly assessed fee-normally one to three percent of total assets per year.
In accounting for annual fees, you can specify whether the fee is to be treated as if paid out of pocket or whether shares of securities will be sold to pay fee. Further, if shares are sold to pay the fees, you can opt to have them first satisfied from the sale of any cash equivalents that may be included in your portfolio illustration.
If you assume that shares are to be sold to satisfy the fees, the market value of the portfolio will decline each time a fee is assessed. Because the market value declines, return will also decline.
On the other hand, if you opt to pay fees out of pocket, the market value will not be reduced when the fee is assessed. Morningstar will treat the fee as a cash flow from the investor. As a result, the return of the portfolio will be reduced even though the ending market value is not impacted. If an annual fee is assessed on the portfolio end date, it is subtracted from the Final Market Value in the Investment Summary. In this case, it is not added to the Total Investment. The rationale for this special treatment of out-of-pocket fees on the portfolio end date is that when looking at final values, investors want to know the net proceeds or value of their portfolio. When annual fees are paid out of pocket, they are added to the Net Dollars Invested (which represents the investor’s out-of-pocket cost of investing) and they are added to the investment value in the chart.