Riding the wrap

4 February 2010

I can’t say I’m that surprised. Aviva is coming to the wrap party late. It needs to catch up fast.

What is interesting, at least in hindsight, is the way wraps have become the latest and possibly the final battleground in which up-front commission is likely to play a major role ahead of the RDR coming into force in 2012.

Just over eight years ago, I was taken out for lunch by Justin Urquhart-Stewart, who had just left his position as marketing director at Barclays Stockbrokers to help launch Seven Investment Management.

Back then, I worked for a daily newspaper and Justin was keen to pers uade me and therefore our paper’s readers of the merits of wrap accounts in general and his own proposition in particular. Although they had been available in Australia and the US for years, wrap accounts were a new concept in the UK.

Essentially, Justin wanted to sell me a combination of benefits. The most basic was much clearer and more thorough analysis of clients’ total assets and goals, using sophisticated software to examine the geographical distribution of assets or break them down by risk categories. As a result, financial planning options would be vastly improved, he told me.

Finally, wraps offered a simple charging structure. Instead of a range of different fees based on each product type, clients simply paid a percentage of assets under management.

What Justin didn’t say neither did he actually need to in fairness, as it was rather obvious that, by pooling clients’ assets, a wrap provider should be in a position to negotiate significantly reduced fees with fund managers, thereby pocketing the difference.

It is interesting to note that IFA opinion back then was deeply divided as to the merits of wraps accounts. In an article I wrote on the subject almost exactly seven years ago, the redoubtable Doug Brodie, at Master Adviser, in London, said: “Wraps are a scam, the industry’s version of Pokemon cards a fad that will blow over. It is basically the industry saying we can’t sell you our investment funds, so please will you buy this service instead.”

Doug was wrong on one count wraps are no longer a fad. Among many IFAs, they are an increasingly popular tool, allowing them to service their clients’ investment needs more easily and effectively than before.

Seven Investment Management now has something in the region of £2bn parked in its own wrap account while those from other providers also manage many billions of pounds in total.

Where Doug was more correct, however, was in his understanding of a major reason why wraps have become so popular among providers themselves.

Several years ago, a senior industry player told me in an email: “In the long term, life companies are dead in the water, at least in their present form. They have little to offer policyholders other than a parasitic relationship with fund managers and products whose structures are no longer attractive to most IFAs.”

Right or wrong, and many of us might reject such a view as unduly harsh, wrap accounts offer one way out of that impasse, allowing a product provider to act as another intermediary in the process of looking after clients’ funds for a fee, naturally.

This, in turn, explains why many life companies, including Aegon, Standard Life and Aviva, have battled to launch viable wrap offerings to IFAs. The problem for Aviva is that other players have been operating in this field for many years and have skimmed off all the low-hanging fruit, leaving only the harder-to-reach money for its own wrap.

Hence the 10 per cent offer, albeit one where as Aviva has been careful to state IFAs can decide their own remuneration and it must be agreed with their clients first. The company expects the overwhelming majority of advisers to opt for the average of 0 per cent and 3 per cent, although if it does one wonders why it did not just restrict potential commission to a more sensible level.

Yet for all Aviva’s offer might make sense in industry terms, one wonders exactly how it will play with cash-strapped clients who have seen the value of their portfolios collapse since the start of the recession.

The idea that simply by shifting your money over to a wrap will earn your adviser even 3 per cent of the total value of your hard-earned funds might not go down very well with many.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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