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Bubble wrap

The benefits of the wrap proposition have been overblown

The efficiencies enabled by wrap platforms are numerous, making them an extremely attractive concept to many advisers. However, I wonder what analysis has been carried out to determine what percentage of clients would get value for money from wraps.

For clients with complex and ever-evolving portfolios of invested and uninvested wealth, wraps can certainly bring benefits of clarity and consolidation at a reasonable cost. The whole wrap concept clearly has a place here.

However, wrap providers do not offer lower rates for relatively wealthy clients who have simple needs and a more straightforward portfolio. Indeed, the rates are higher.

How can an adviser justify the explicit administration costs of a wrap with far more functionality than the client is ever likely to need? Will the adviser be faced with discounting the commission or fee earned for their part in the relationship? Wrap platforms provide an excellent solution for some but certainly not for all.

I believe that, with the current offerings available, the market for full-blown wrap platforms is likely to be limited from consumers’ perspective and concentrated at the top end of wealth accumulation. IFAs who use wrap platforms tend to focus on clients with over £500,000 of liquid investments and/or income of over £100,000 a year. I would estimate that most client banks have fewer than 5 per cent of clients falling into this category.

The standard fee paid by clients direct from funds to the wrap provider could be as much as 0.6 per cent. This is before any fund manager charges and any fees levied by advisers. If one assumes a fund management charge, adviser charge and other policy charges in addition, the funds being managed may need to grow by 2 to 2.5 per cent just to stand still, before inflation and taxation have played a part.

As a result, there must be real value perceived by the client to warrant paying for such a service. The value is not in the wrap platform itself but in what the adviser does with the time they have saved to add value to the client in other ways.

To charge this overall rate, the market must deliver high quality, holistic financial planning and maybe lifestyle planning and coaching. This is how the Australian market has justified the charges, with advisers delivering comprehensive financial planning propositions. The Australian market also differs in that it has compulsion and a less debt/mortgage-driven culture, leading to more equity-based assets per capita.

To me, the fee levied for looking after clients by way of wrap platforms looks similar to trail commission. Traditionally, under trail commission, clients with smaller funds probably underpay for the value they get and those with bigger portfolios overpay although some discounting at higher levels is usual. Most wrap providers tackle this through a tiered charging structure.

But charges based on a percentage of funds under management imply that the wrap provider or adviser is in some way managing the underlying investment. Is there a truly value-based argument for a percentage of funds approach to charging for ongoing service? A devil’s advocate might suggest it is done this way because it is the easiest method.

An alternative approach would involve a flat annual retainer charged by the wrap provider with set fees for each transaction undertaken on the platform. The adviser would charge a fixed annual retainer applicable to the complete service proposition. This should reflect the reduced cost of administrating the client’s portfolio but fairly reward the value the adviser adds in terms of strategic financial planning and specialist services.

If such an approach is not offered by wrap providers, advisers could adopt other systems which provide daily price feeds, valuations and portfolio planning tools via other means. These yield administrative time benefits but at no additional explicit charge to the client.

Given that a very small percentage of the population have the wealth to make wrap a cost-effective option, it could be that for many clients a combination of such packages could be an approach worthy of evaluation alongside a wrap proposition. Maybe cheaper “baby wrap” versions are a solution to creating a bigger market?

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