What the TV dinner did for eating, the wrap accounts sold by banks have done for investing.
Picture this: You walk into a branch, you answer some questions about your investing goals, your time horizon and your attitudes toward risk and then you're directed to one of a series of wrap accounts, which are prepackaged blends of mutual funds. Investing doesn't get any easier than that.
But beyond this portfolio-in-a-box convenience, there's not a single good reason to invest in a bank wrap. The fees are comparatively high, the returns all too often are mediocre or worse and the methodology behind them can be questionable. Some of the same criticisms can be levelled at higher-end wraps sold by fund companies and investment dealers, but bank wraps are the worst. You're better off just buying individual funds to build your own portfolio.
The analysis firm Investor Economics has found that money invested in mass-market wrap programs sold by banks and other deposit-taking institutions ballooned to $24.8-billion as of June 30, up from a consistent level between $16.3-billion and $17.5-billion between 2000 and 2003. Investor Economics says the jump in wrap sales reflects the success that banks are having in selling investments through the in-branch financial planners they've been adding in the past few years.
Wraps do have some attributes that can make them seem better than portfolio-building with individual funds. The blend of underlying funds in a wrap is calibrated to the client's risk tolerance, and this precise mix is maintained through automatic rebalancing. Clients also receive detailed performance reporting that surpasses the lame standard of most fund account statements.
All the banks have something to offer in the over-the-counter wrap category, with Toronto-Dominion Bank and Royal Bank of Canada among the most successful in gathering assets. Globefund.com shows 56 different wrap variations in TD's Managed Assets Program (MAP), with various permutations that emphasize growth and income in registered, non-registered and segregated accounts. TD Managed Balanced Growth RSP portfolio is one of the largest bank wraps with $1.7-billion in assets and it's an ideal example of the genre.
Bank wraps are typically positioned in various slots along the risk spectrum. Balanced Growth fits in somewhere between TD's aggressive growth wraps and its income and moderate growth products. Balanced Growth is described in marketing material as being for someone whose objective is "to generate long-term capital growth while also providing the opportunity to earn some interest and dividend income." This portfolio is designed for investors who can accept low to moderate risk and who have a medium to long horizon.
What you're buying with this wrap is a fully diversified portfolio that includes exposure to bonds, through the TD Canadian Bond and TD Short-Term Bond funds; Canadian equities, through TD Canadian Blue Chip Equity, TD Canadian Equity and TD Dividend Growth; U.S. stocks, through TD U.S. RSP Index and TD U.S. Blue Chip Equity; and, global stocks, through TD International RSP Index, TD International Equity and TD Global Select.
In case you lost count, that's a total of 10 funds for a portfolio that can be as small as $2,000 for registered retirement savings accounts, or $5,000 for non-registered accounts. Arguably, that's overkill.
"Theory says that the more diversification, the better and the more you own, the more diversified you are," said Moshe Milevsky, finance professor at York University's Schulich School of Business. "But at some point, the marginal benefit goes to zero."
Prof. Milevsky said you could create a well-diversified portfolio with five well-chosen mutual funds. "I just don't see the point of 10," he added.
Fees are another knock on bank wraps, as they are with all wraps. The problem here is that the company offering the wrap usually charges a sizable fee for packaging the underlying funds together (one exception is Bank of Montreal's MatchMaker portfolios).
For the investor, this means they'll pay the fees associated with the underlying funds, plus an extra amount for packaging. The net impact is a big drag on the wrap's performance.
The MER on TD Managed Balanced Growth RSP is 2.45 per cent, which is half a percentage point cheaper than the average MER of its peer funds in the global balanced category. By other measures, though, this wrap is very expensive.
The 10 constituent funds in TD Managed Balanced Growth RSP have management expense ratios ranging from a high of 2.84 per cent for TD International Equity, down to 0.86 per cent for TD Canadian Bond. The average MER is 1.87 per cent, which falls to 1.49 per cent if you count all 10 MERs according to their weighting in the wrap.
Unenlightened minds like to say that performance is all that matters with funds, not fees. TD Managed Balanced Growth RSP is a stronger performer than the average global balanced fund over all time frames of five years and less, but this isn't a useful comparison because global balanced funds don't have much exposure, if any, to Canada, while TD's wrap is 57 per cent invested in Canada.
Canadian stock and bond markets have performed well lately, but TD Managed Balanced Growth RSP's five-year compound average annual gain is just 1.89 per cent. Remember, we're talking here about an all-in-one portfolio product, so this is essentially your entire portfolio returning 1.89 per cent a year.
You'd have done far better if you invested in a few of the funds that make up TD Managed Balanced Growth RSP. If five years ago you put $2,000 into TD Canadian Blue Chip Equity, $2,000 in TD US RSP Index and $2,000 into TD International Index and $4,000 into TD Canadian Bond, you'd have earned an annual 4.7 per cent a year, turning $10,000 into $12,268.31.
TD has a respectable in-house fund family, as do some other banks. But for people who don't like the idea of a wrap comprising bank funds, some institutions offer wraps using third-party funds. TD has its FundSmart third-party wraps, while Bank of Nova Scotia has its ScotiaPartners funds and RBC has RBC Select Choices.
The $422-million RBC Select Choices Balanced Fund has included about 10 different funds from families such as AIM-Trimark, AGF, Fidelity and CI, as well as RBC. With an MER of 2.42 per cent, this wrap seems fairly priced in comparison to most of its underlying funds.
Yet the performance is unexceptional at 2.97 per cent a year over the past three years (the fund has not been around long enough to have a five-year history).
Much better results could have been had by mixing a few of the funds available to RBC's Select Choices portfolios along these lines: $2,000 in CI Harbour, $2,000 in RBC O'Shaughnessy U.S. Value, $2,000 in Trimark International Companies and $4,000 in Trimark Canadian Bond.
Here, you'd have made 7.3 per cent a year over the past three years, turning $10,000 into $12,364.
The sales pitch for bank-sold wraps is that they're an easier, more intelligent, more personalized approach for investment know-nothings than using individual funds. The reality is quite a bit more mundane, according to Prof. Milevsky. "Finance academics look at these things and they say, 'wrap account, what is this?' It's just another mutual fund."
Unravelling wraps
Wrap products give you instant portfolio diversification in a single product and they're growing rapidly in popularity. But finding out whether they're the best investment for your portfolio takes a little work. Here are details on some of the most popular bank wrap products that you can use to compare to other investment options, including individual mutual funds and wraps sold by fund companies and investment dealers.
A look at some of the most popular bank wrap products
| Fund name | Asset class | Net assets($million) | MER | MinimumInvestment | 1-yearreturn | 3-yearreturn | 5-yearreturn |
| CIBC Managed BalancedGrowth RRSP Portfolio | Global balanced And asset allocation | $377.8 | 2.5% | $500 | 3.9% | - | - |
| CIBC Managed Balanced Portfolio | Global balanced andAsset allocation | 515.4 | 2.3 | 500 | 3.7 | - | - |
| CIBC Managed Growth RRSPPortfolio | Global balanced andAsset allocation | 207.0 | 2.5 | 500 | 3.7 | - | - |
| MatchMaker Strategic Balanced | Global balanced andAsset allocation | N/A | * | 1,000 | 5.5 | 2.6% | 2.5% |
| MatchMaker Strategic Growth | Global balanced andAsset allocation | N/A | * | 1,000 | 6.7 | 2.8 | 1.0 |
| MatchMaker Strategic Security | Canadian Bond | N/A | * | 1,000 | 3.7 | 2.5 | 3.1 |
| RBC Select Balanced | Canadian balanced | 1,807.0 | 1.8 | 5,000 | 8.0 | 4.4 | 4.0 |
| RBC Select Choices Balanced | Global balanced andAsset allocation | 422.5 | 2.4 | 5,000 | 6.1 | 3.0 | - |
| RBC Select Conservative | Canadian balanced | 965.9 | 1.8 | 5,000 | 7.3 | 4.7 | 5.1 |
| RBC Select Growth | Canadian balanced | 832.7 | 1.9 | 10,000 | 7.8 | 3.8 | 2.5 |
| Scotia Partners BalancedIncome & Growth | Canadian balanced | 248.4 | 2.4 | 5,000 | 5.8 | - | - |
| Scotia Partners ConservativeGrowth | Canadian balanced | 208.8 | 2.5 | 5,000 | 7.9 | - | - |
| Scotia Select Balanced Income& Growth | Canadian balanced | 115.7 | 2.2 | 5,000 | 5.6 | - | - |
| TD Managed Aggressive GrowthRSP Portfolio | Global balanced andAsset allocation | 1,568.7 | 2.6 | 5,000 | 8.3 | 2.3 | 0.3 |
| TD Managed Balanced GrowthRSP Portfolio | Global balanced andAsset allocation | 1,711.1 | 2.5 | 5,000 | 7.6 | 2.9 | 1.9 |
| TD Managed Income & Moderate Growth RSP Portfolio | Global balanced andAsset allocation | 826.2 | 2.3 | 5,000 | 7.2 | 3.6 | 2.9 |
* as per the underlying BMO mutual funds
© The Globe and Mail
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