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Platform ticket

Wrap platforms will work for advisers if the rest of their business is working efficiently and profitably

The falls in world markets at the end of the second quarter marked a significant change for financial markets. Many believe that these falls were enough to discount the many risks which had built up in the past three years but we take a different view.

The most commonly cited reason for optimism is robust earnings’ growth. This is true but there are two questions that must be asked. Does robust growth mean it will continue ad infinitum and does robust growth equal an advance in prices?

Studies show that growth rates in excess of 25 per cent of their long-term trend are consistent with some of the slowest periods of growth in the next two years. Second, significantly above average earnings’ growth precedes periods of equity market weakness (and recession). The early 1980s and early 1990s are prime examples.

The high earnings’ growth we have enjoyed recently can persist for some time and it is prudent to be invested with that trend despite its extreme nature while analysts revise their forecasts higher and there is plenty of liquidity to push prices higher. Now that earnings are being revised lower and interest rates appear to be at levels sufficient to throttle borrowing, the probability of slower earnings’ growth having an adverse effect on prices seems high.

Corporate profits have edged up to 12 per cent of GDP, a condition last seen in 1965, when 10-year interest rates were similar to today at 4 per cent. Yet the equity market peak of that year marked the start of a 12-year bear market. The fact that corporate profits are so high relative to the overall economy shows that the disparity in wealth is becoming more pronounced, where the owners of capital are clearly taking a greater piece of the pie than the providers of labour (the workers).

The likely backlash that this will induce will take time to manifest and this is a critical challenge that global economies must tackle. Does the huge source of Asian labour mean corporate profits as a percentage of GDP will remain high? There is nothing to deny that there may have been a structural shift in this relationship and until labour conditions in Asia are tight, providers of capital will get a greater share than they have in the past. Yet much has to do not only with the supply and demand of labour but also the supply and demand of a particular quality of labour. Chinese graduates are accelerating and so, too, is the pace of industry. More recently, we are hearing reports of acceleration in wage costs for highly skilled workers in China. This would explain why unit wage costs are creeping up in America, which is consistent with falling profit margins and falling equity prices.

In light of the excessive capital spending binge in the last decade, corporate balance sheets are surprisingly rosy. In part, this is explained by managers assessing costs at the margin rather than on average. This has led to the outsourcing model keeping costs under control while freeing up capital. The result has been high profits for a lower cost of capital, allowing cashflow to build up and debt to be paid down. But more recently, share purchase programs have distributed cash and raised debt levels at a time when we expect cashflow to slow in line with profits. So the argument that “good corporate health” is a reason for optimism is likely to diminish in the months ahead.

Many commentators argue that falling mortgage and energy costs are surely a benefit for consumers but we are merely back to where we were six months ago. If prices stay at these levels, there will surely be some improvement in consumption but it will be marginal.

In all likelihood, it seems the falls in the second quarter were not sufficient to discount an impending growth slowdown. Once this materialises, equity markets will fall as investors will realise they were deceived by the concept of a soft landing.

Nick Wakefield is an investment manager at AshburtonWrap platforms continue to get plenty of media attention. Despite steady growth in advisers using wraps, the depth of usage per firm appears variable, to say the least. I believe there are several reasons for this. First, the adoption of a wrap platform will not, in itself, repair a business model that is broken to begin with. Similarly, having a menu of fees does not mean that clients will engage advisers on a fee basis.

Wrap platforms are an excellent means of providing efficient investment admin but in this day and age, clients expect good admin. They do not regard it as a high-value service.

Technology in itself is not a differentiator. After all, if, in due course, clients use wrap platforms themselves, what value would an adviser add? Without true value built into an adviser’s proposition, why would clients voluntarily pay an extra 0.5 per cent for the privilege of getting what they would regard as standard, basic admin?

Typically, but not exclusively, only very wealthy clients are transferred to wrap platforms. Convincing the client to transfer is made easier because of the discounts available when significant sums of money are moved. Transfer of some but not all clients means that a business is not adopting the wrap concept comprehensively.

This creates inefficiencies by complicating rather than simplifying the array of systems, packages and processes already used by different people within the adviser firm. Such complexity undermines the ability of the business to deliver real value at a competitive price.

Wrap platforms are therefore only part of the adviser’s proposition and business equation. Other elements include transparent charges and, most importantly, the capability and professionalism of the adviser to deliver the proposition to clients. It is all very well for the business to create more time to work with clients but if the quality of the engagement is not valuable, challenging and thought provoking, what is the client paying for?

For example, there is little point in rail firms”dressing” up stations if their trains are grubby and old and the tracks are unreliable. Likewise, there is limited value in wrap unless the proposition is designed and aligned to make it efficient, profitable and relevant to a wide enough market.

To achieve this, each firm needs to unbundle its morass of systems and processes and encourage everyone to follow a consistent methodology. Too often, different RIs within a firm want to do things their way and this creates inefficiencies as well as increasing the risks to the business of errors being made.

These conditions are key to attracting and maintaining a client base big enough to enable a business to generate the benefits of operational efficiencies, improved productivity and long-term capital value that working with wraps can facilitate. In short, structuring the whole business to deliver the value proposition is essential.

To reap the benefits from adopting a wrap, businesses need to drive operational efficiencies and effectiveness throughout their business model. Wrap is not the solution in itself. This includes having an aligned IT strategy, tidying up and segmenting their database, raising their game around their client-facing proposition and skills as well as developing a credible transparent charging strategy and the capability to market it.

In short, it is not an easy task and needs a strong commitment from the business and probably good external support as well.

Simon Olive is a senior business consultant at Axa

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