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Wrap realities

Some commentators have suggested that the FSA has thrown a spanner in the works by asserting that if advisers seek to deliver all a client’s investments through a single wrap, they must ensure that packaged products are considered from a range of providers in order to be called independent.

Many commentators have been quick to criticise the FSA and suggested that the regulator does not understand the wrap market. I am not one of them.

Indeed, I would suggest that far from the FSA not understanding the wrap market, it could be more a case of the critics not understanding the role of the FSA.

The FSA is a regulator and its primary concern is the consumer. It is not a trade body for the convenience of the market.

At this point, can I suggest a reality check? Imagine for a moment if the FSA had suggested that any adviser could call themselves independent by selling the products of a single product provider as long as that provider offers a wide enough range of external fund links.

Let us forget briefly that a number of banks and building societies have quietly been offering the products of a single provider in each product area for some years.

Such a suggestion would rightly bring a chorus of derision and indignation from the IFA community so why should things be any different if the adviser has chosen to offer the single provider’s product via a wrap account?

I have read much about why wrap accounts are better for advisers. I agree with this but, at this stage of wrap evolution, I believe the case for consumers is far less clear. Wrap accounts can certainly provide the consumer with a more convenient way of investing and they can get nearer a holistic position of their wealth but at what cost?

If wrap can deliver a far more efficient trading envir-onment for advisers, life offices or platform providers and fund managers, why should the client not share in some of the economies, too?

Today, many wrap accounts will significantly increase the amount that a client is paying in charges. In their defence, wrap advocates will point out that consumers pay far more in wrap charges in other countries such as Australia.

This conveniently ignores the fact that there is vigorous debate going on in the Antipodes over exactly this subject, with many commentators suggesting that consumers are paying far too much for advice.

I believe the biggest mistake that the life and pension industry made in the latter half of the last decade and at the start of this decade was to outsource their asset management to fund management groups via external fund links.

In reality, most life comp-anies are no longer financial product manufacturers but have moved down the value chain to become wholesalers.

This is a dangerous path to tread as too many life offices are taking on the expensive cost of maintaining relationships with distribution while at the same time passing on institutional volumes of business to fund managers who are somehow managing to maintain retail margins.

We simply have too many people trying to take too much out of client investments. Advisers reasonably want to be paid, as do platform providers, life companies and the fund managers. I am in no doubt who should have to take the greatest cut in their income – fund managers.

Increasingly, I find myself trying hard to tell the difference between fund managers and Premiership footballers – both are paid obscene salaries, they have gigantic egos and while you do get the odd equivalent of Wayne Rooney, for the most part, they deliver pretty mediocre performance relative to their remuneration. But if you have people stupid enough to send a vast ocean of money in your direction, it would be silly not to make hay while the sun shines.

We need to call time on the excesses of the fund management industry. Wrap (nor Sipp) alone will not rescue the life and pension provider market. Indeed, they provide a very real risk that their underlying investments will be further cannibalised.

As I see it, fund managers may be better at wringing out more performance in a good market but I would always rather opt for an actuary to protect me against losses long term and which is the more valuable service?

Life offices need to remember what they are good at and at the same time stop overpaying fund managers for mediocre performance.

Major life offices and other platform providers can deliver scale to fund management groups. If they do so, they and their customers should pay no more than institutional prices for the volume they deliver.

If a fund manager can really deliver exceptional performance year in year out, I am sure that no one would begrudge them bigger than average fees but let us only pay those fees if and when the fund manager delivers.

Providers planning their wrap services would be well advised to include mechanisms within their toolsets to enable advisers to show clients exactly how much they have been paying fund managers for the performance they have had in recent years.

If they can then offer lower overall pricing to the customer, we should be able to create a wrap market that is good for the consumer as well as everyone else.

In its guidance, the FSA points out that wrap account charges can be opaque and that while it can be easy to move a client on to a wrap, getting out of a a wrap can be a far different affair.

If assets have been consolidated on to a platform, that is a service of value but after a reasonable period to recoup the cost of consolidation, customers should be free to move their investments to a lower-cost environment if they choose.

The current situation where, for a couple of the biggest providers, you can re-register on to their platform but not off, appears to be a constraint upon competition and contrary to consumer interest.

If the Competition Commission looked into this, I have little doubt that it would strengthen the ability of wrap platforms to negotiate lower rates with fund managers and have a significant effect on the price that consumers pay for fund management.

You do not have to think too hard to work out how wrap accounts, even those operated by life companies, can easily offer products such as investment bonds from multiple packaged providers. Let us not let this distract the industry from a far more important issue – making sure that wrap delivers good value for money to consumers. If we can get that right, everything else will follow.

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