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Tap into wrap

FSA guidelines for wraps will not hit advisers that put client needs first but they need the appliance of science for portfolio design or the wrap will add no value

Brett Davidson
Brett Davidson Chief executive FP Advance

Recent commentary from the FSA regarding wraps (and platforms) has sent a scare through the market. Is this the end of the section for wraps? Absolutely not. Businesses that put the client’s needs first will not fall foul of FSA guidelines regarding wraps.

Wraps are most helpful for designing, holding and managing investment portfolios that consist of several underlying funds. Advisers today can
assemble high quality diversified portfolios for retail clients that even 20 years ago were the preserve of large institutions and wealthy individuals.

Done well, this should lead to better long-term investment performance for clients but the emphasis is on “done well”. If
there is no science behind portfolio design, the wrap will add no value to the client. Assuming that you are establishing more sophisticated diversified portfolios for mostclients in your business, there are some benefits in doing it all via a wrap:

Clients receive one statement that reports on their total portfolio or at least the bulk of their portfolio, even if they hold some older legacy assets.

Clients rarely turn up at their initial meeting with an A-Z index of their financial affairs. More often, they arrive with a disjointed view of their financial position, which you disentangle over weeks and months. They have purchased a bunch of products one at a time over many years and receive quarterly statements for each. I defy anyone to pull all that together and turn it into a sensible financial strategy. That is what advisers get paid good money to do and wrap plays a crucial role here.

Clients can go online and look up the value of their portfolio at any time and consolidated tax reporting can be provided at the end of each tax year. Not only is this convenient but it saves the client money.

Regarding the cost issue, don’t let the FSA, clients or anyone else fool you on this one. The total cost of investing is not approaching 2-3 percent,as some claim. A wrap proposition is not a glorified funds management offering, it is the central piece in delivering a broad range of services, advice, investment management solutions and tax reporting. Top advisers break down the costs on “who does what” for their clients (and the FSA) to help them understand the real value of each participant in managing their affairs.

Participant 1: The fund managers
When purchased via a wrap, the cost of various investment options range from as low as 0.15 per cent through to 1.77 per cent. Typical cost after rebates from fund managers is around 0.75 per cent. The question alladvisers should be asking of their fund managers is: Do you add value after fees? If the answer is yes, great. If the answer is no, a cheaper, simpler or better performing option needs to be found.

Participant 2: The administrator
The wrap itself simply provides an administrative and reporting function, charging somewhere around 0.35 per cent.

The questions to consider here are:

  • What would the cost be for the client if you had to do all of this administration and reporting work yourself ?
  • Do features like consolidated tax reporting and online access add value to the client? The answer clearly is yes but you might apportion value differently for different clients.
  • By not having to perform these tasks for clients, can you do other things that add value to the client’s situation? Again, obviously, the answer is yes.

Participant 3: The adviser
Top advisers charge 1 per cent of assets under management to provide a high quality ongoing review service to their clients. The key question is what value do you add for your 1 per cent a year? The answer is lots – from pension strategy to IHT strategy, you could be saving your clients thousands of pounds.

The cost and value of each participant in the process needs to be considered separately. Two bigger questions arise:

  • Who adds the most value for the client?
  • Who is going to come under most pressure in the future?

Top advisers add value and will be able to maintain their margins even in a wrap environment as long as they are choosing strategies and solutions that are best fit for the client (otherwise known as “your job”).

The funds management industry is going to come under enormous pressure to show their value added (i.e. beat a benchmark after fees). To be credible this will have to be shown over long periods of time, not 2-5 years but 15-20 years (which to be honest very few can do). The alternative will be to index or go passive, stripping out the costs of active management, wherever they don’t genuinely add value.

The administrators will also be under pressure to deliver value at a fair price and will be scale businesses. But with genuine transparency, competition should help keep pricing fair and reasonable.

Think of it this way, if a client only wants their money invested they can go to a discretionary fund manager or buy funds themselves. Either way their cost will be much the same as when you get involved but they won’t get any advice or strategy.

Similarly, if the client doesn’t believe they need administration services they could save that cost, although in many cases that would prevent you from working with them effectively (as someone will have to do the admin work) and so they would also miss out on the advice. When put in context the total costs are not actually the cost of investing, they are the cost of the total package. If the adviser performs their role professionally then none of this will be a problem for clients, advisers or the FSA.

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