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The test for wrap

There has been a vigorous debate over the past few weeks on the FinServ forum on the future role of wrap accounts in our industry.

As I usually find the list an interesting sample of adviser views, this leads me to believe that some of these points are worth a wider airing. For those who do not know of it, FinServ is an email forum ( through which those interested parties debate a wide range of issues ranging from industry-focused concerns to the merits of various satellite navigation systems.

The latter is an example of the list getting somewhat off topic but there are separate sub-lists for differing special areas of interest, such as marketing, technology, networks, etc, as well as a community list where more idiosyncratic issues are meant to be debated.

As anyone who has subscribed to FinServ over a period will know you have wade your way through quite a lot of general chat to get to the things that matter but every once in a while it comes up with some valuable debate.

The recent wrap debate is a good example. In the last year, few subjects can have taken up more pages in the industry press than the merits or otherwise of wrap accounts, yet ask any two people in the industry what a wrap is and you are likely to get at least three answers.

I have long felt that one of the best things anyone planning a wrap-type proposition could do would be to come up with another name for it.

There are a wide range of very different propositions now broadly using the wrap banner. These vary from technology-based platforms which aggregate together a wide range of different investments and deliver them, for a fee, in an aggregated fashion, some very actively managed discretionary investment platforms and, increasingly, open-architecture propositions from financial institutions that offer the adviser a mechanism for delivering a wide range of different product wrappers via a single platform.

Frequently, one hears protestations from one or other of the players in this area of the market that another player’s proposition is “not a proper wrap”.

These conversations bore me rigid. There may well be different variations on a central theme but does this really matter, indeed, is not such competition and innovation a good thing?

Too often, I hear statements that this or that cannot be a wrap because that is not the way it works in Australia or the US.

Well, with due respect to our Antipodean and North American cousins, I don’t care, this is the UK and if the wrap market evolves in the UK rather differently to the way it has elsewhere in the world, that is not necessarily a bad thing.

What we need is new products and services that deliver value for money to the consumer. Essentially, I have always seen wrap as having a very broad definition. Such a service will allow an adviser to deliver to their customer assets from a wide range of investment providers using a range of product or tax wrappers.

To me, it is far more important to deliver value to the consumer rather than if a product fits any narrow definition of what such a service might be.

Does it really matter if one product cannot include the most obscure investment product or VCT?

Much of the debate over FinServ in the last week has been over this issue of value.

Clearly, there are those advisers who have embraced different wrap models and see them as the way forward for the industry. Broadly, I would agree. Conceptually, such approaches, whatever you call them, have much to offer but how many of these new services really represent value for money to the consumer?

If you forget for a moment that you work in this industry, it is hard to support the way in which the investment industry uses financial smoke and mirrors to hide the true costs on investment management.

It is difficult to see this as anything less than a national scandal. Ron Sandler correctly identified this as part of his review of the savings industry and nothing has really changed.

This is where I see wrap’s greatest opportunity and, to date, its biggest failing. All such services seem to be based broadly around taking a holistic approach to advice. Invariably, this extends at some stage to measuring investments and recommending them based on an appropriate asset allocation.

The ground-breaking research in this area is widely accepted to be that of Brinson Hood and Beebower who, in 1986, identified that by far the greatest determinant of investment performance was not market timing or stock selection but asset allocation.

Their study has been updated in 1991 and 1995 by Brinson and Beebower with Singer. If this is correct why are financial advisers continuing to recommend clients into products attracting high annual management charges when there are similar products with substantially the same asset allocation but whose charges are a fraction of those made by many fund groups for their retail alpha products?

Against this background, it appears to me that assuming that asset-allocation theory is correct, there must be a compelling argument for getting the client’s asset allocation right and then finding the funds with the lowest possible management charges with the corresponding asset allocation.

Now it could be argued that the primary importance of asset allocation as a determinant of overall performance is hokum but if that is true rather a lot of the other arguments in favour of operating a wrap platform and the benefits of the tools usually associated with them seem more than a little questionable.

You only have to look at the fall in the savings ratio in this country over the last few decades to recognise the extent to which this industry has lost the faith of the consumer.

If new ways of working give us the opportunity to regain consumer confidence then that has to be a good thing but if we are just going to foist on the consumer even more products that extract ever increasing levels of charges from their savings and erode the value of their investments, then we do not deserve their trust and we will not get it.

Regardless of the variations in their operating models I believe that the first test of the suitability of a wrap has to be whether it can deliver better service at lower cost to the consumer. Those who fail such a test are unlikely to fulfil all that is expected of them but those who can might just start a savings revolution.


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