Wraps are perhaps the most comprehensive tool available to advisory firms that wish to adopt an ‘annuity income from assets under management’ business model, one that most investment orientated advisory firms either aspire to or practise.
However, with the FTSE 100 down more than 30 per cent over the past year, the prospect of a prolonged recession and with it the inevitable dearth of new money, and complaints from previous investors, these are not easy times to be moving clients to wrap and the business model to ‘annuity income’.
That said, the imperative to improve productivity and client service is stronger than ever, and the market should focus on some of the broader issues regarding the use of wrap, such as the proposition for the client, choosing wraps and fund-related issues.
Explaining the benefits of consolidating their existing assets on to a wrap or platform to clients is not always straightforward.
For example, it has occurred in the past that a platform consolidation strategy was implemented that involved the creation of a service and investment proposition designed to give clients tangible benefits for moving some of their existing assets into what amounted to a wrap environment.
Some months after the launch, when asked which benefit of the exercise most resonated with clients, advisers answered overwhelmingly that it was a reduction in the number of different pension and investment statements the clients received, rather than the improved investment proposition that had been put in place.
Benefits
The wider issue of articulating the benefits remains in the market today. There are a number of reasons for this.
First, despite the fact many wrap providers have made available the tools needed to create an effective and compelling investment proposition, across the market there are many advisers who are not fully equipped to communicate a compelling investment story associated with holding assets in a single, open-architecture environment. In part, this may be because of fears that talk of a ‘consistent asset allocation and fund selection methodology across much or all of your wealth’ is something clients thought they were getting previously. They may be distressed to hear that, in fact, they were not.
However, this and similar issues must be overcome. Individual advisers need a compelling proposition or ‘story’ for the client if the market penetration of wraps is to be driven to the next level.
The linked issue is, of course, advisory firms’ investment proposition itself. After all, a wrap is an administrative vehicle that can provide clients with efficient access to a range of tax wrappers and a wide selection of assets.
The true benefit of wrap to clients is in the services it enables advisers to provide to their clients, which would otherwise be costlier or more difficult. Crafting an effective investment proposition is no easy task, especially for smaller firms without the resources to employ an in-house investment team.
For example, earlier this year the manager of a small wealth management firm was considering his firm’s investment proposition.
He wanted to offer a wrap-based investment service to clients that was tailored to his firm but not actually run the investment management in-house.
Although they are not wrap based, the Omnis funds offered by Openwork advisers and managed by Octopus Asset Management are a good example of the kind of proposition that would have met his needs.
The good news is that parts of the investment management sector understand and aim to meet this need, with notable examples including F&C Asset Management through its risk-graded Lifestyle funds.
Administration
However, whether the wrap-based investment proposition is managed inhouse or outsourced it could be based on straightforward model portfolios run on an advisory basis or a discretionary service – it is crucial that it is well understood and supported and can be communicated effectively by all the firm’s advisers.
The role of the wrap within the proposition as a high-efficiency, low-cost administration mechanism also needs to be understood.
Of the elements of service, advice, asset management and administration, the last has historically been the ‘poor relation’ and advisers need to be able to articulate the benefits of good administration, especially where costs are unbundled.
In terms of adviser support, alignment of the adviser remuneration model to serve the firm’s wrap strategy while managing any conflicts of interests to ensure the fair treatment of customers is critical, as is adviser training focused on ‘buy-in’.
In 2004, a senior representative of a wrap provider told several large intermediary firms they had to sign up with his wrap immediately because their firms would otherwise be left with an outdated business model and ultimately fail. None of the firms signed up, and it was the wrap in question that failed to attract much new business.
This story hints at one of the issues regarding signing up with a single platform or wrap: the relationship becomes more like a business partnership rather than an ‘at-arm’s-length’ relationship between an intermediary and a supplier.
Moreover, if, say, 70 per cent of an advisory firm’s clients have their holdings on a single wrap or platform that experiences administrative or commercial problems, it can do huge damage to the firm, in a way that the same thing happening to a traditional provider generally cannot. This is one of the key aspects of the trade-off for the transformational administrative efficiencies a wrap can bring.
One way this can be mitigated is to have relationships with more than one provider, split by business area (one platform for pensions, another for investments), by client segment or in some other way.
Of course, to achieve the full benefits of wrap, there must be a final aggregator of client data, and this leads to the debate of wrap versus back office/CRM.
There is no clear-cut answer here, as some of the issues include the size of the advisory firm, the resources it wishes to commit to administrative efficiency and its client profile.
Processes
At the most basic level, there is a set of processes involved in advising the client, holding and reporting on the client’s assets and reviewing the client, most but not all of which can be performed in more than one place – for example, on a wrap or using a front-office/back-office/CRM system.
Clear decisions are needed about which task is to be performed where and how the process fits together in order to deliver the service proposition to clients and the administrative efficiencies to firms.
There is a need for the development of a set of ‘target operating models’ showing the advantages, disadvantages and issues from the various approaches. This builds on the work done by the FSA in its wrap factsheet.
The important role of brand in the choice of a wrap is often not given a great deal of explicit consideration. The advisory market is not generally characterised by strong consumer brands, and many clients are reassured if their money will actually be held by a ‘household name’.
The brand of the underlying asset managers is another factor where collectives are an important part of the proposition. Broadly speaking, the advisory firm needs to consider the issue in the context of its marketing approach.
Provider vs adviser
A key question is the level of prominence given to the wrap provider as opposed to the adviser and the asset manager in the way the service is promoted.
Is it: “We, your trusted advisers, have created an investment proposition to meet your needs, and in order to administer the proposition have picked XYZ wrap or platform” or “We have searched the market and recommend ABC wrap or platform as it offers market-leading service and a range investments from which we create portfolios that meet your needs”?
The costs of getting this approach wrong can be high, as advisers and clients may not buy into the wrap-based service if the emphases of the adviser, wrap and asset management brands are misaligned.
The adoption of wraps and platforms will continue, driven by the increasing need for administrative efficiency and the development of advisory propositions.
However, the advisory firms to win the promised benefits of adopting this technology will be those that consider adoption in the context of their own service and investment propositions.
They will understand their ‘end-to-end’ advice processes and what tasks should be performed where, and take their advisers and clients with them on the journey towards the very different advisory proposition that wraps can enable.
Simon J. Farrant, APFS, chartered financial planner, is Director of Financial Planning at Distribution Technology
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