There are many offerings labelled fund supermarkets. But what is a fund supermarket and how are financial advisers to decide which are potential allies, which are potential competitors and which are irrelevant?
A brief survey shows the term fund supermarket is one of convenience. The services provided vary greatly, with the only common feature seeming to be some kind of online or internet presence.
Looking at this broad church, let us
whittle it down into a more logical set of definitions to give IFAs a clear basis for assessing all the options.
Is the service direct or advised?
Any service that allows investors to buy investment assets without recourse to advice is, at
best, irrelevant to IFAs and, at worst, a short-term threat. Into this “direct” category fall services such as Egg, Virginmoney, and Fundsnetwork's direct offering.
IFAs may feel threatened by consumers having the opportunity to buy funds like cheap commodities – and more so by the fact that the providers “own” the clients.
But the US experience has shown that investors do so on a caveat emptor basis. Without a proper financial plan, many will fall into the same trap that befalls the person who thinks it is more important to buy cheap bricks for building his own house than to pay for an architect. They will eventually all end up needing someone to sort out the mess.
Let us dismiss the direct offerings as of no immediate relevance to IFAs.
That leaves the services that claim to offer something to IFAs.
What asset classes
Having assumed a service will enable advisers to be paid for their advice, let us look at what is available.
First, what types of investment can be bought? Well, in almost every case, the choice is limited to unit trusts – and only some unit trusts at that.
Ignoring incidental changes in range, both Fundsnetwork (the IFA version is the only version I am referring to) and Cofunds have offerings restricted to unit trusts or Oeics only. They constantly compete to offer a wider range than the other and will continue to do so.
But the compulsory exclusion of many unit trusts, many Oeics, all investment trusts and all other London-listed equities will severely restrict client and IFA choice.
What tax wrappers are available?
As with asset classes, the types of tax wrapper available to IFAs through supermarkets seems to be very severely limited.
Skandia's multi-manager products are available online and Fidelity has just added Peps and new direct investment but Cofunds offers nothing but Isas. That may change in the future but, for the time being, IFAs need to ask themselves whether the exploitation of the internet for Isas once a year or for new business only is a viable business proposition. After all, for services that are simply “online Isas” or “new business only” (excluding existing clients) fund “supermarket” is rather too grand a term.
In some cases, the answer to the Isa question will be positive. Online Isas can fulfil a useful function. They allow firms of advisers to satisfy a client's desire for an Isa in a cost-effective fashion – by capturing a case with a maximum size of £7,000 without the costs of proper fact-finds, meetings and so on. For firms that are internet-enabled, “Complete the case and keep the client” is a valuable axiom.
How does pricing work?
Both Cofunds and Fundsnetwork have decided to charge fund managers rather than investors. Although this gives some flexibility to the IFA to negotiate rates with providers, this limits their services and loses any benefits to the IFA or client of bulk dealing.
Is the service online or offline?
The last criterion for judgement is possibly the easiest. Do you or your clients want to be forced to buy online only?
Experience shows the answer is often no. Clients like to feel “secure” by trading in the old-fashioned paper way.They often want more than just an Isa so a good service should offer offline as well as online trading.
Curiously, Cofunds and many offerings from others, such as InterAlliance, are unable to complete every case as an online trade (they download application forms), so you do not have to worry about them in this context.
That leaves Fundsnetwork – which is a proven online service. It will be interesting to see how it copes with offline business.
So what do IFAS do?
The first thing to do is to ignore the internet hype. Most TMT funds have realised this at last.
Ask yourself what you need to provide a better service for clients, a more profitable business for yourself and an easier life for your back office.
Such a service would provide access to an unrestricted asset range – all unit trusts, Oeics and LSE-listed equities, a tax wrapper suite that adds direct holdings, Peps, pensions and
offshore bonds to Isas, and the benefits of
aggregated trades giving institutional invest-
ment rates to clients. None of these features would be dependent upon the internet.
The second generation
If all these objectives could be achieved, then IFAs would be able to offer a truly comprehensive wealth-management service to clients.
It is this “ideal” second generation of IFA service that will make a real difference to IFA businesses in the UK. With less than a year in the market, the current fund supermarkets are already rapidly becoming obsolete. They will have to change, and change fast, to meet this model.
The second generation has already arrived in the UK and true financial advisers will do well to look them out.