Wrap revolution means IFA evolution

Trying to define a wrap service is difficult but describing what they do is easier. It is generally acknowledged that the first of what we now call wraps appeared in Britain about five years ago, the early offerings based either on the Australian master trust model or the UK supermarket idea. The former, as they developed here, were designed as a service to the intermediary and paid for by his client. The fund supermarkets, on the other hand, made the distribution of investment funds much more efficient and were paid for by the fund managers. Although both could be described as wraps, the current fund supermarket model would be at the minimalist end, with a restricted range of funds and a limited number of tax wrappers. This article will concentrate on the wraps that are paid for by the client and not by the fund manager.

What, then, do wraps do? Basically they provide two services. The first is transactional in that they provide an aggregated dealing service and will buy, sell or hold virtually any mutual fund, often a wide range of shares, offshore funds and cash. This is done through a nominee company. They provide a re-registration service for existing assets to be transferred, in specie, where permitted. Holding all this data on one platform enables the adviser to obtain online valuations, transaction histories, income statements and CGT reports at the press of a button.

The second service is the provision of the tax wrappers in which the assets might be held. In addition to Peps and Isas there will usually be a range of pension wrappers including Sipps, personal pensions (with freedom to choose the assets), executive pensions and Section 32 buyout bonds. All of these will provide drawdown or phased drawdown facilities. There may also be onshore and offshore life bond wrappers. For those investments to be held outside a tax wrapper there is the “ordinary money” account where assets are simply held in a nominee account to enable aggregated dealing.

Advisers who have not already done so must change their business models in order to remain independent and survive. The impact of depolarisation, the rules on menu disclosure of commission and whole-of-market offerings emerged from the recommendations made by Ron Sandler in his report a few years ago. As these changes are introduced they coincide with dramatic reductions in the levels of initial commission available to advisers. The old business model is clearly inappropriate. Either it has to change or the adviser might be better to forgo his independence and tie to one or more financial service providers.

In the “new independent” world the emphasis has to be in two areas. First, advisers have to justify themselves by the quality of the advice that they provide and secondly, the client has to pay for this advice. As Sandler pointed out in his report, it is inappropriate for the providers to be paying the IFA if that advice is to be seen as totally independent.

A wrap service is an essential ingredient in the new business model. Although transferring business on to the platform can be time-consuming initially, this is a “one off” exercise leading to substantial time and cost savings thereafter. As technology improves, the transfer process itself becomes less labour intensive. It is essential for advisers to reduce their own administration and to spend far more of their time meeting clients and not dealing with providers. One-stop online information on all of a client’s assets is a sure way of achieving this. The adviser can then concentrate on quality of advice by using the time saved for training, study and the employment of technicians and not paper-chasers.

Turning to the second point – about who pays the adviser – the wrap service will also assist here. Under the agreement that clients sign they instruct the wrap provider about the form and amount of remuneration that they have agreed to pay the adviser. The wrap provider will then pay the adviser on behalf of the client from the cash held within the investment portfolio. It does not matter whether that payment is a fixed fee based on an hourly rate or an ad valorem charge, the essential thing is that it is the client who is paying for advice. Deals are placed with fund managers net of any initial commission. In addition, because the wrap platform places all the deals on an aggregated basis, it is usually able to obtain rebates on both in initial and annual charges from the managers, which are then credited back to the client’s cash account. Everything that happens within the wrap service is completely transparent and usually available online to the client via his own computer. The fact that the client can see his own valuations, transactions and so on, possibly through the adviser’s own website, all improves the adviser’s professional image.

All of these things alter the adviser’s business from product sales to one based on the execution of a financial plan. It changes the emphasis from front-end remuneration to fund-based recurring income, thus aligning the interests of the adviser and his firm with those of his clients. It is also likely to enhance the ultimate value of the advisory business.

The introduction of wraps could be called revolutionary but their future development will be evolutionary. As more advisers adopt them as their preferred form of managing investments they will find, as users, room for improvement. One sometimes reads of advisers who declare that they will not adopt wrap until it has everything they need. This is a bit like saying that they will not buy a car until it has everything. In that case they will never buy one, because the next model will always have some improvements. The difference with wraps is that when improvements are made they are usually adopted by the system you use – competition ensures that. You do not have to trade in the model to buy a new one. Even at their present stage of development it is hard to see how advisers can survive, let alone prosper, in the post-depolarisation world without embracing the wrap concept.

MALCOLM F MURRAY
Head of sales and marketing at Transact