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RRSP

The investing account that can save you from yourself Add to ...

There's nothing like a near collapse of the global financial system to nudge investors into admitting that they may, in fact, need professional help.

Investment products known as wrap accounts - all-in-one portfolios that contain mutual funds or other investment products and are professionally managed for a flat fee - have seen their popularity rise as investors opt to hand over the bulk of the management of their savings to a professional.

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"Investors who bailed out during the crisis would have lost all the upside and guaranteed a downside," says Thomas Dyck, president of TD Mutual Funds. "Using wraps avoids that problem."

That's because wraps essentially save investors from themselves.

A wrap account is basically one big basket of investments in a single account managed by a professional. They can include mutual funds, stocks, bonds and cash. Once the investor decides on his or her level of risk tolerance and asset allocation, the wrap account manager handles security selection, fund manager selection and regular rebalancing. Today, some version of wraps are offered by all major banks and mutual fund companies.

The biggest drawing card of wraps is their simplicity, and in light of the increased complexity of the financial products that were being spun out by Wall Street banks leading up the financial crisis, investors seem more keen to hand over the controls. "They're saying this is complex stuff and I don't have the time or inclination to stay on top of it," notes Mr. Dyck.

Once the investor outlines the plan, then that's, as they say, a wrap. They won't be second guessing those decisions every time the markets take a turn - in either direction.

Indeed, the importance of removing all emotional decision making from the equation cannot be overstated, says Tony Maiorino, vice-president and head of RBC Wealth Management Services. The stock market has shown time and again that it almost always ends badly for investors.

"The only way to make money is to buy something at a dollar and sell it at $10. But our instinct is the opposite. The biggest mistake you see is people making gains but they don't sell," says Mr. Maiorino. "If you let a wrap account do what you set out for it to do and don't get involved if things get either really good or really bad, it's worth it."

So what does it cost to lighten the emotional load? RBC's Global Balanced Portfolio, which requires a minimum investment of $250,000, carries a fee of 1.65 per cent. For a mutual fund wrap account, say the RBC Global Portfolio Series, investors will pay the steeper 2.1 per cent, primarily because investors can get in with an initial investment of just $1,500, which means more investors and more management time, and because it's made up of underlying mutual funds, which are more complicated to manage.

TD's wraps - called "comfort portfolios" - range from conservative to high-growth, based on the investor's goals. Some contain only mutual funds, while others have individual securities.

Mr. Dyck says they're ideally suited to retail investors at the early or middle stage of their investing life, also known as the accumulation stage, but there are also income-producing wraps that are more conservative for people further along the career path.

Regardless of the demographic profile, most investors want to keep it safe and simple, he says.

"Instead of buying five mutual funds and staying on top of them, you buy a wrap product that includes five mutual funds and the adviser manages it," he says. "The investment professional does the day-to-day work of maintaining it to keep to the parameters set out at the beginning, and you do the job of continuing to save and not pulling your money out."

Reliance on your wrap account manager could be viewed as a downside to these investment products. It means investing a great deal of trust in one person to oversee your financial interests. "Choosing that investment professional is a critical part of the decision," says Mr. Dyck.

Mr. Maiorino agrees with Mr. Dyck that the financial crisis of 2008-2009 resulted in increased investor interest in wrap products. "Any time you have volatility in the markets, it makes people take a second look at how they are managing their investments," he says. "We've certainly seen a shift where some clients are selecting the all-in-one solution."

Of all of the wraps' selling points - transparency of fees and investment activity, automatic rebalancing, manager selection and the simplicity of one statement - auto-rebalancing is the key, says Mr. Maiorino.

"As markets are going up you're trimming the winners and investing in other areas," he says. Typically this is where hands-on investors make the big mistake - hanging onto stocks when they're going up and later bailing out, and locking in losses, when they're tanking.

"It forces investors to avoid the herd mentality," adds Mr. Dyck. "History shows investors often sell at the bottom of the market and buy at the peak, but to be successful, you have to avoid the urge to act."

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