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Inside edge

Kylie Minogue, Foster&#39s Lager and such great songs such as Tie me Kangaroo Down Sport. Some of the great imports from Australia seem set to be joined by the wrap account. Hardly a household name yet but just wait and see.

Over the past few years, wrap accounts have been huge business in Australia, where master trusts have dominated the market, with tremendous steps forward in technological innovation and service delivery. What started in the US and has been popular in Australia is now heading for the UK.

Wrap accounts offer a complete investment and reporting solution for intermediaries to manage client assets across multi asset classes.

One wrap account for a high-net-worth individual could feature their Peps and Isas, their pension, their onshore bond and their offshore bond.

Underneath them sit a variety of asset classes such as bonds, direct equities, unit trusts, Oeics, investment trusts, property and cash.

What are the implications for advisers? First, it could lead to possible sizeable reductions in back-office administration and consequent cost savings. For those big firms needing to further cut costs in tough times, wrap account solutions for clients could enable them to reduce staff headcount and gain efficiencies.

Second, the technological expertise typically available to intermediaries through wrap account providers would enable asset allocation modelling and portfolio construction to be delivered to the client via a one-stop shop.

Third, such an all-encompassing solution would enable intermediaries to spend more time on client relationship management rather than distribution of products.

What are the implications for investors? First, consolidated reporting of assets in the wrap account is a step on again from fund supermarkets in that all asset classes are covered.

Second, there is simplified access to all their assets via a single point of contact, typically allowing daily review and valuation of assets in the wrap account. Third, the confusing boundaries between different products would be removed, allowing the investor to fully access and control their wealth.

Most intermediaries manage different asset classes for clients through various product types and therefore have to deal with a large number of providers and chase paperwork and commission across a broad range. With wrap accounts, clients will typically be paying a fee to their adviser based on the value of all assets in the wrap, irrespective of their asset type.

It is also likely that wrap accounts will be another major step forward for open architecture (the inclusion of multiple funds from multiple groups), with most intermediaries likely to access a very wide range of underlying mutual funds.

Given the need for intermediaries to demonstrate increasing levels of diligence and skill in asset allocation, the technology offered by wrap providers is likely to be revolutionary. Some of the software and portfolio modelling is mind-blowingly impressive and is able to graphically represent for the client the clearest possible explanation of their financial position. This is a big step forward for educating clients about their financial position – a key aim of the current Government and a core objective of the FSA.

Add to this the likely simplification of UK pensions into a single regime in 2005 and this will offer a massive simplification of the products required in the wrap, with reductions in the cost of launch and support. This may be the catalyst for change which will propel wrap accounts into the mainstream.

With stockmarkets recovering somewhat after a torrid three years, clients are more receptive to discussions about their investments. The first phase of reorganisation of underperforming funds and repositioning of portfolios has been completed. Phase two of many intermediaries&#39 business plans is to rationalise their reporting via fund supermarkets to monitor and manage mutual funds. Phase three could be a new dawn for wrap accounts as the financial services industry embraces this welcome arrival from Down Under.

Ian Chimes is managing director of Credit Suisse Asset Management Funds


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