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Take account of wraps

Online fund supermarkets have not been in existence for much more than two years but they are already a significant feature of the financial services landscape. Looking forward, there is a new development which is already being touted as the next big thing – wrap accounts. These accounts have been around in the US and Australia for some time but they are only just appearing in the UK.

The concept of a wrap account involves the following:

•An internet-based technology platform bundling a range of services for clients/ advisers. Typically, the services offered will include portfolio construction (via a series of models), dealing, valuation reports and investment research.

•A mixture of underlying assets. Flexibility on holding underlying assets can vary, a simple mutual fund wrap would only offer underlying investments in unit trusts and Oeics. A more sophisticated offering would also offer direct equity holdings and possibly even insurance products.

•Funds under management based fees that are levied on the wrap account as a whole. Although fees might vary dependent on the nature of the underlying assets, typically, the fee levied could be anything from 1 per cent upwards.

•An administrative solution for advisers. They should be able to use the platform as their own quasi back office.

The nature of the wrap account can be seen as adding a level of sophistication and client service to the widely recognised benefits of the fund supermarket. Currently, holistic financial advice for a client is complicated if a client has holdings across a wide variety of providers with differing servicing standards, reporting frequencies etc.

The wrap has the potential therefore to revolutionise an adviser&#39s relationship with a client, removing the admin burden of dealing with lots of third party providers. Instead, the automated wrap account frees up advisers&#39 time to focus on providing the value-added services (investment advice, tax planning, etc) in a far more timely and cost-effective way. The automation of portfolio valuation and dealing information will also help considerably when doing tax computations.

Implicit within the wrap account is the charging of a fee based on funds under management of a particular client. The significant uplift clients should see in terms of service, transparency and reporting should make the conversation on fees easier, albeit obviously not everyone will be convinced. In any case, the minimum account size probably needs to be around £20,000 to make the business viable.

In summary, the wrap account could revolutionise an adviser&#39s business:

Advisers themselves can focus on their core competency – giving advice. This should have a knock-on effect on their profitability as advisers become more productive and expend less effort on admin.

Inevitably, there are issues that will slow the rise of the wrap account. They include the following:

•Business proposition – any entrant into the wrap account market needs to attract new investment business but also, more importantly, the transfer of investments already held by clients. There is a natural tendency to inaction among investors which needs to be overcome to drive the growth in this business. This inaction can be justified both on the grounds of wishing to minimise ongoing costs but also as a way of avoiding re-registration costs which could arise on transfer of existing investments.

•Number of providers – for the markets to operate efficiently, there is a requirement for a number of well resourced players to commit resource to building and supporting the technology platform that underpins the wrap concept. At the moment, it is probably fair to say that that there is still rather more talk than action in this respect. The technology exists but it needs to be customised for the UK market.

•Admin issues – one of the most significant benefits of wrap accounts is their capacity to aggregate information about different kinds of products or investments from different kinds of providers. Clearly, the practical implications of doing this are complex and potentially costly to resolve, particularly if there is a desire to allow investments other than mutual funds and equities.

To conclude, wrap accounts can offer advisers and their client significant benefits but the market will probably take some years to get going bec-ause of the weak market environment and the technological/admin hurdles which have to be overcome to deliver the concept.


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