Many life companies are looking seriously at wrap. Some, such as Friends Provident and Axa, have publicly committed to launching their own wraps, joining Standard Life and Norwich Union in the emerging sector.
Life offices are concerned that their dominant position is under threat. Morgan Stanley said in a research paper this year: “An increasing number of advisers are now using wrap platforms, with a significant proportion believing their relationship with platforms is more important than with the product provider.”
The demise of with-profits funds and greater use of open-architecture investment products offering a wide choice of third-party funds has created a model that requires a life company simply to provide and administer the associated tax wrapper. Its role becomes little more than a comm-oditised service to deal with tax relief.
However, take the same model but where the wrap provider is also the source of the tax wrapper and it is clear that the part played by the traditional life company will eventually become redundant.
Transact, the longestestablished independent wrap provider in the UK, has already created such a model. With the use of UK and offshore subsidiary companies, Transact provides the wrappers for personal pensions and onshore and offshore bonds. With one fewer mouth to feed in the distribution chain, there is a different dynamic to how fees or charges are shared.
Other wrap providers will inevitably follow suit to take advantage of this improved financial model.
That said, how real is this perceived threat to the life industry? The answer lies partly in the degree to which the intermediary market adopts wraps. At present, wrap is synonymous with fee-based financial planning for high-net-worth clients and those at the upper end of the mass-affluent market.
There are clear potential advantages to IFAs if they adopt wraps for all their clients, including reduced administration, consolidated client reporting, more time with clients and business development, but take-up in the UK has so far been slower than predicted.
Does this mean that wraps have only a limited appeal and that the traditional life company model will live on? I suspect that the answer in the short term is yes. Over the longer term, I believe the benefits of wrap will prevail, even for the mass market and IFAs will derive benefits regardless of the segmentation of their client base.
Life companies may not be under immediate threat from wrap but over time they could become vulnerable, particularly in a market where they are already under pressure to reduce costs, improve service and increase distribution capability.
As a pre-emptive strike, more of them may decide to act sooner rather than later and launch a wrap service. But if and when they do, they have to be able to attract sufficient numbers of IFAs to make their proposition viable in what could become a crowded market.
Brand is probably no longer the differentiator it used to be. In an open-architecture model, it is the underlying fund managers’ brand and performance that will reflect the quality of the IFA’s advice and recommendations. It is that other historic differentiator – service – that will determine the winners and losers.
Wrap provision starts from the moment an IFA signs up for the service by providing help and support in establishing the processes, controls and technology links necessary to achieve the benefits sought by the IFA.
The ability of the IFA to white-label their service is also key so that their clients can attribute the quality of service directly to their IFA, thereby enhancing their relationship and making it easier to justify any wrap-related fees.
Another strategy for new entrants to gain the support of IFAs is to offer a wrap service that supports all clients, regardless of level of sophistication. After all, today’s product-buying client is potentially tomorrow’s sophisticated investor. Helping IFAs to service their clients at the start of their wealth journey and to support the investor’s increasing needs as they grow their investment portfolio could be a key future differentiator.
The current UK wrap model is clearly focused on the IFA market so this is the principal dependency for its success. There have been numerous concerns expressed about the willingness of investors to pay an additional fee for a wrap service. This raises an important issue about how the UK positions the service to investors but we can turn to Australia to help us answer this particular challenge.
In Australia, there is a significant difference in the underlying culture of advisers and investors. Australians perceive there to be real value in the service provided by their advisers through the use of wrap services. Advisers are generally highly regarded by Australian investors – and there are many of them due to compulsory superannuation. Advisers leverage this regard to promote the benefits of wrap and investors accept paying a premium to reap these perceived benefits.
Attitudes are somewhat different in the UK where consumers typically accept the “invisible” commission hit rather than seeing real money go to the adviser in the form of a fee. Clearly, the UK has some work to do in promoting the benefits of wrap to the investing public.
But what of life companies that do not choose the wrap route or those that lose out to the emerging leaders? One of the biggest assets that life companies have is their administration capability. Could we see some of them becoming low-cost administration hubs providing services to their peers and leveraging their combined scale to drive down costs further?
It is clear that the traditional role of the life companies will change. Wrap may be a catalyst for this change but there are other forces also in play. Doing nothing is not an option. Every UK life company must have a defined strategy to underpin its chosen path and ultimately its survival.