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Wrapping up new business

Let me start by making a statement of the obvious. The world is changing and financial services is not exempt. Some changes are small and some are fundamental. Some are desired and some are forced on us.

The continuing development of the wrap represents a good opportunity to stop and think about the changing shape of finan- cial services, both from a product provider and dis- tributor perspective.

The speeding up of the evolution of both these components of the wrap proposition over the past few years has meant that, for many of us, there has not been enough time to stop and think. It is not that the pace has slowed recently, just that acceleration of interest in the wrap gives us a good opportunity to have a quick pit stop before resuming the race, so to speak.

One thing that has become obvious is that by no means all the life companies in the market actually offer what could be seen as their core product – life insurance, except that nowadays it is called protection. Just this change in terminology, I believe, masks this very important fact. Of course, technically, offices that do not offer protection do offer life insurance. However, the technical definition of a life insurance policy does not necessarily conform with the definition that would be given by the man in the street or on the Clapham omnibus, for that matter.

The definition given by the man in the street would, I suspect, involve something along the lines of paying relatively small premiums to secure the payment of a much bigger sum when you die. Of course, there are events other than death that you can insure against but that would broadly be it.

But, as we found out in connection with the Aetna vs Fuji case, all that is necessary for a contract of life insurance is that payment must be dependent on human life. This has been interpreted to mean that, even if there is no element of protection cover provided by a policy – that is, an additional payment dependent on mortality – the contract will still be one of life insurance.

This is extremely import- ant in respect of single-premium bonds. Here, the prime requirement of the policy- holder is to achieve investment returns. But many offices still provide a small extra amount on death, typically, 1 per cent over the unit value. Of course, more could be provided and, arguably, as the cover would be funded from unit deduction, this could represent an effective means of IHT planning where the bond has been gifted or underlies an IHT planning strategy such as a loan trust.

But I digress. The point was that there is continuous movement in the business undertaken by manufacturers of financial products, including life insurers.

I have just looked at the case of the many life insurers which do not offer traditional life insurance but it does not stop there. Some are involved in wrap business and may even have a proprietary stake in a wrap. Of course, the wrap is most definitely not a financial product in the strict sense, in the way that an insurance policy or collective investment is. It is, however, a potentially effective admin- istration platform where clients can consolidate and manage their entire portfolio.

Now, some of the investments in a portfolio will have been physically transferred to the wrap administrator. In this case, the information held on the wrap is likely to be up to date. Where such a transfer has been made of, say, collectives or insurance products, the wrap administrator will be the nominee. This means that the administrator (or another designated person) will own a legal but not a beneficial interest in the investments. This ownership structure will be similar to that of the traditional portfolio manager who looks after an investor’s share portfolio on a discretionary or other basis.

For those assets and investments that are not physically transferred on to the wrap platform, having up-to-date information feeds on them will nevertheless enable a complete picture to be given. This is useful when it comes to considering asset allocation across the whole portfolio.

As I have mentioned in past articles, even where assets are physically transferred on to the wrap platform, neither the transfer nor the holding of the asset will cause any change to the tax consequences, which will remain wholly with the investor where the asset is not held on trust.

So, what is behind a life insurance company seeking by developing and offering a wrap? The direct sources of revenue generation are:

  • From the products held on the wrap, including investment management of the underlying funds.
  • From the administration charges for running the wrap.

In an ideal client-focused world, the lower charges made by the providers of products on the wrap will effectively fund any additional wrap fee so that the client pays little or nothing for the additional service.

Naturally, however, there are other factors at play for wrap providers. Retaining contact with and influence over key distributors of one’s core products is no doubt important. For some, the development of the wrap could even represent the beginning of a more radical shift in the business model to one of an investment administrator as opposed to an investment provider. For many, it may be just supplementing potentially reduced income from historic core products. For others, a key driver may be the simple need to be s een to be involved in what many consider to be a key market development.

You will also be aware of a simultaneous move by some fund supermarkets to stock up their shelves with insurance and pension products. Here is another opportunity for insurers to oblige with the provision of ready-made wrappers for the wide range of funds that can be bought in the supermarket.

Then we have those whose core business plan is the provision of the wrap platform, where there may be no history of product provision. These platforms represent another place for providers with appropriate product wrappers to secure a stream of income, not necessarily from fund management fees but just through providing the outer wrapper.

Regardless of where a business starts from, there seems to be some convergence going on. We techies must remember that the wrap is a place where investments are held or where information on investments is held. With this is mind, we can be reassured that all the planning that can be carried out with particular products should continue to be possible, even if the product is held on a wrap.

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