The wraps are going on investments. With innovative ways of separating the cost of advice from the actual product, wraps may well be about to become important tools for advisers, intermediaries and their clients.
In Australia, the “wrap” market is pretty advanced – the products already account for a massive 70 per cent of retail investment business arranged by intermediaries. In the US, South Africa and elsewhere, similar structures are rapidly gaining momentum. The UK is lagging behind – at least for now.
New initiatives such as the Sandler review and CP 121 are forecast to change the UK's investment landscape. It will not be long before wraps begin to make a big impression over here. A couple of players – notably Transact and 71M – are already making their presence felt in the wrap market.
More infrastructure than product, a wrap contains the product and tax wrappers that are traditionally sourced from product providers.
For the intermediary, the wrap joins together fact-finding and access to knowledge tools with the ability to make recommendations, execute transactions, obtain a single view of clients' investments, deliver reports, run the back-office and develop the practice.
It is, to all intents and purposes, a business in a box. But this is no ordinary business.
In the normal course of events the intermediary recommends a product – say an Isa, a pension or an investment bond – to the client. That client, as part of the package, buys a tax wrapper and an investment fund. The tax wrapper may include third-party investment links but the institution will always take its cut as the money moves to the underlying funds.
The wrap presents an attractive alternative to that funding structure. With wraps, we are looking at completely different mech-anics. Wraps make their money from either fixed fees and/or as a percentage of the investments they administer. They separate the product from the investment fund that traditionally goes with it.
So the wrap intermediary who recommends an Isa product can honestly claim that all charges are 100 per cent transparent. The wrap platform, meanwhile, hosts the Isa free of charge. Units are purchased from fund managers at wholesale prices. All record keeping, unit pricing and reporting is carried out by the wrap provider.
How the wrap works is for the wrap provider to act as the client's nominee. A simple and tax-neutral arrangement, this involves placing client investments into a cash management account initially.
Purchases are then made by the nominee over the internet and the clients' holdings are consolidated to provide a single view of the investments that have been made.
Existing holdings can be transferred into the account to provide a whole picture and clients and advisers can obtain secure, round-the-clock internet access via the intermediary's website. For the client, this is a revolutionary proposition. For the intermediary, the real savings come from a reduction in administration.
Making money out of money
Commission has been a hot topic for some time and the Sandler review and CP121 are adding to the debate.
Wrap products provide an interesting alternative to existing reward structures and are likely to appeal to clients and their advisers. In essence, they separate the cost of advice from the product itself as payments are taken out of the cash management account rather than from the underlying product or fund.
Intermediaries can set their fees as they choose, subject to formal client agreement. They might ask for a percentage of funds invested as an initial payment. They might seek ongoing payment based on funds under management. Or they might quote fixed sums, time costs, a combination of these mechanisms or explore many other fee alternatives.
On the face of it, wraps seem to be scoring points all round – not least for the in-built integrity that comes from their transparent structures.
First and foremost, advisers' remuneration is not linked to the type of product they recommend. Second, fees are paid by clients rather than providers but no cheque has to be written. In theory, wraps are likely to find favour with investors, intermediaries and governing bodies.
By offering advice in return for fees taken from a cash management account, advisers should be able to spend more time managing portfolios and less time processing product transactions.
This, in turn, may change the financial dynamics of their practice – shifting emphasis from initial commission to ongoing fees. This practice is very much in line with the aspirations expressed in the Sandler review.
From a client's perspective wraps offer convenience, transparency, comfort that recommendations are not influenced by how much commission is in it for the adviser and the facility for clients to gain a single view of all their assets.
Additionally, there may be opportunities to cut costs – but this is mostly down to how the adviser prices the proposition and the charges that the wrap provider levies.
Taking Australia as a benchmark and looking at what is already available in the UK it is unlikely that cost savings will be significant – at least in the short term.
For advisers, the wrap concept is an opportunity to present a more professional image – and to deliver on it.
The infrastructure includes knowledge tools that can add genuine value in terms of asset allocation and monitoring. There is also scope to switch to a new business model – one which may be ultimately more valuable than the existing model, which is based on transaction income.
Neatly wrapped up
The interface between intermediaries and providers is primarily paper-based and manual. This creates enormous inefficiencies, reduces the time that advisers can spend with clients and is a major inhibitor of profitability.
But fully developed wrap structures, with appropriate connectivity, have the potential to sweep all these problems away.
The UK investment landscape is changing. Product adoption, CP121 in general, the Sandler review, the growth of the mass affluent market and the need for intermediary wealth management solutions are set to create a strong demand for wrap structures in the UK over the next few years.
Intermediaries are bound to benefit from new opportunities and product providers have new innovation challenges on their hands.