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It&#39s a wrap…

It is hard to disagree with the contention that the current economic model operated by most IFAs is broken. The days of big upfront indemnity commission is gone.

That the industry needs to make a transition to a more professional method of operation is, I believe, widely accepted. How to make such a move is, on the other hand, far from resolved.

There is no doubt there will be a considerable ongoing demand for financial advice for the foreseeable future. Equally, the marketplace is becoming ever more sophisticated and the needs of consumers more complex.

Short of the Government deciding to be far more radical than has been advocated in CP121, Sandler or Pickering, we are still going to be left with a marketplace where there are a multiplicity of complex products.

Giving financial advice requires a considerable degree of knowledge. While there is no shortage of the need for advice, the Government, in its wisdom, decreed that the cost of such advice, or at least the revenue that can be funded entirely out of product charges, must be limited.

With recent suggestions from the FSA that the 1 per cent limit might be reviewed, it appears that the Treasury is going to need a great deal of persuading and quite rightly we will never return to the commission structures of the last century.

The challenge to our industry is to find new ways of working that enable more efficient and effective ways of transacting business. For a long time, I have viewed independent advice as a great idea in theory, it just does not work in practice.

Not because of the concept of giving consumers advice on the full universe of products available is not attractive. Clearly it is. In reality, however, the administrative burden of dealing with bigger numbers of product providers for lots of different products makes the process economically inefficient. Who in the end pays for such inefficiencies? The consumer.

If you can bring together the benefits of dealing with a big number of different product providers but contain the investment in a single account relationship, there must be significant savings that can be achieved. This is, of course, the basic premise behind fund supermarkets but it need not necessarily be limited to just investment business.

If the multi-manager principal of fund supermarkets can be extended to incorporate multiple types of products such as a pension and a life policy over and above the simple Isa, Pep and managed funds contained within a supermarket, there must be further efficiencies to be achieved.

Known as a wrap account, this concept is in fact already highly successful elsewhere in the world. In Australia research by Norwich Union, which, with their Navigator product, is one of the biggest players, suggests that between 60 per cent and 70 per cent of all new investment retail money now goes into wrap accounts or the similar Master Trust facilities.

Norwich Union Australia general manager (operations) Brian Hawkins says: “Australian IFAs have been able to achieve savings of about 50 per cent of their back-office costs by using a single platform provider, as opposed to working with 15 or more different providers, and these services are equally attractive to consumers. Consolidated rep-orting, a wide choice of funds and free switching plus competitive pricing are providing investors with significant benefits.”

The biggest player in the Australian wrap market is AMP with over $20bn in such accounts. Damon Watkins, AMP&#39s UK business development director, identifies arguments in favour of the wrap that must sound compelling to any IFA seeing their workload increasing while revenues decline. He says: “Taking cost out of the adviser&#39s back office and improving the customer experience frees up time for the adviser to invest in imp-roved professional standards and asset allocation. The wrap allows the adviser to focus on the customer and the adviser&#39s knowledge base.”

On a more cautionary note, Watkins points out: “Having a wrap on its own will not solve the profitability problem, you have to re-engineer the practice around wrap products to crack profitability.”

Leading-edge technology is at the heart of a wrap account. Holding all the client investments in a single platform enables the adviser to take a holistic approach to issues such as customer attitude to risk and asset allocation.

Although the concept of placing all the client investments within a single wrapper provider may seem alien to many IFAs, the multiplicity of underling fund choice removes much of the constraint that more traditional tied environments offer.

Also, the greater operating efficiency means that objective impartial advice can be offered at a price the consumer can afford. This is achieved without the need for big upfront charges that decimate the value of the investment before you start.

We are already seeing wrap-type products emerging in the UK. Skandia&#39s product, Hypermarket, and Selestia&#39s offering, which now extends to life insurance bonds in addition to the Isa and managed funds elements, are examples.

We are also seeing some non-product manufacturers enter this market as a pure platform play. Funds Direct is a good example of this. Last week, chief executive Sean Ewing told me: “We are developing a wrap capability which will enable intermediaries to move on to a model which will have all types of tax wrappers within a general wrap account. This will facilitate multi-manager products leading to re-occurring income streams between provider and adviser and will lead to clarification of the transparency of product costs and advice.”

In our work with the Adviser Technology Forum, my company is conducting research into what major IFAs believe to be the do&#39s and don&#39ts for wrap accounts in the UK.

It is early days and by no means all the results are back yet but some interesting messages are emerging. One important factor will be that while such accounts will provide significant technology, this will not replace advisers&#39 own systems and the wrap account systems must be fully able to talk to the IFAs back-office systems, not least because there will always be some existing investments that cannot be incorporated in the wrapper.

For IFAs trying a more sustainable long-term economic model, there must be significant arguments for placing as much new business as possible in environments such as wrap accounts.

The alternative is to continue to send good money after bad by placing it in an environment that can no longer work for the consumer or adviser in the long term.


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