Each month in an exclusive survey with Incisive Research, RealAdviser canvasses a broad panel of advisers on a wide range of different topics and, this month, we ask for their thoughts on wrap. While the concept continues to gain acceptance - three-quarters of the advisers in this year's survey use wrap to some degree, compared with about half of those questioned this time last year - a vocal minority still remain to be convinced. We asked our advisers about the sort of groups they prefer to see backing their wrap and how they see the industry evolving. We also asked those who had adopted wrap how it had benefited their clients and their businesses and those who had yet to do so just what was holding them back and what more providers could do to convince them.If there is one thing the UK financial market has struggled with in recent years, it is distinguishing between genuine innovation and market fad. Even the supposedly reliable with-profits bond eventually revealed a sting in its tail and so it's hardly surprising many advisers view innovative products with significant scepticism - and often adopt the attitude of 'better the devil you know'.
The attitude to wrap has been no exception. Much like multi-manager, wrap came to these shores in a variety of forms and on the back of success in the US and Australia. Yet, despite its successful CV, many advisers preferred to ignore the possible benefits of an aggregation platform and instead soldier on through the reams of paper and regulations surrounding their clients' investments to try and forge a successful business.
Questions were also asked as to what a wrap actually was. Providers weren't exactly helpful in this regard, launching their products under various guises - as wraps, fund supermarkets or platforms. But again, as with multi-manager, with time has come a gradual acceptance of wrap as a credible aggregation service for advisers and clients alike.
Add in the increasing amount of regulation that is 'manoeuvring' advisers towards an advice-led - as opposed to transaction-led - model and it is no surprise that wrap, in all its various guises, has started to grow exponentially over the last few years.
The results of this month's RealAdviser Inquiry is indicative of this growth, revealing that 75% of advisers canvassed now use wraps in some portion of their business - an increase of 28 percentage points on 2005. Furthermore, four-fifths of those now adopting wrap said they had increased their usage in the past 12 months.
So what has changed? According to Ian Thomas, head of marketing at Skandia MultiFunds and Selestia, it is purely psychological. "The attitude is that it is not just a niche product anymore," he says. "It has gone well and truly mainstream - something that is reflected by the number of advisers, clients and subsequently assets on the platforms.
"It was more of a lonely battle two or three years ago but the ongoing life and pensions debacle, A-Day and their slow growth and eventual acceptance have all acted as a watershed for platforms in the UK."
Rob Fisher, head of marketing and propositions at FundsNetwork, agrees. "Nothing major has stood out," he says. "It has been more a case of gradual acceptance in terms of sales and asset growth on the platforms. For example, Cofunds and ourselves are now approaching the £9bn mark, making us both mainstream companies in the market."
One of the biggest issues still surrounding wrap is the number of perceptions of them in the market. When asked which route they felt most comfortable using, our panel pointed to fund supermarkets, where the bigger providers such as Cofunds and FundsNetwork have been operating for some time. Of the advisers polled, many pointed to fund choice, better administration and the ability to form a 'wrap of wraps' as their rationale for choosing fund supermarkets.
So with all these different variations in the market, is UK wrap evolving in any particular direction? "The whole wrap/platforms market is travelling in a number of directions, while at the same time converging into one mass product," replies Thomas, somewhat cryptically.
"Fund supermarkets have been focused on Isas and Peps while life companies have tended to begin with bonds. However, the need for growth and the incorporation of technology and investment tools will see these different breeds combining into similar products."
Of course this early stage of the market brings its own problems. "As the market continues to grow in terms of assets coming into the industry, the number of providers in the market will also escalate," notes Philip Martin, business development director at Nucleus Financial Group.
On the plus side, with numerous providers continuing to join the market - particularly life offices as they seek to find new ways to ensure inflows into their respective businesses - the features of wrap have had to improve as each group bids to retain its market share.
According to the RealAdviser Inquiry, advisers believe the incorporation of wrap into their respective businesses has had strong returns in terms of convenience, administration and control while, on the client side, wrap has assisted in the ability to value an adviser's services as well as improving a client's understanding of a portfolio.
Thomas believes level of service is now the prominent feature in the world of wrap. "As a business, wrap has come a long way in the past two years," he says. "Whatever approach you come from, those who are really committed to the market now have all the bases covered in terms of wrappers and administration.
"What advisers really want now is a good service with a partner they can trust. They want to know how fast and keen providers are to help do the best by them and their business. The days of a box-ticking mentality are over. Is the product easy to use? Is the technology up to scratch? Does it provide an all-round service in the widest context? That's what advisers really want to know."
One part of the equation advisers feel wrap still needs to work on, for both themselves and their clients, is cost. Questions have often been raised in the past - and, as our survey shows, continue to be raised - as to why costs are so high on some wraps and even shrouded on others.
"Pricing issues are always going to be there," says Martin. "It is a natural consequence of competition in the market. The total cost to a client is threefold - with access to the platform, then the assets and finally the advice all taken into account - and can sometimes be too high, as it has been in the past. Our view at Nucleus is there should be one single charge for access to the platform - it should essentially be a door to let people in, as wrap is an aggregation service."
Adds Fisher: "On the upside there is far more clarity than there has been in the past. There are different approaches to the market and some may opt for a more specialist offering, which could drive up costs. As for transparency, it is improving but it is a difficult process as regulations in the market have not really been designed with platforms in mind."
Cost is not the only issue wrap still has to tackle. The 25% of advisers who have so far refused to dip their toe into the water were asked to explain their reasons for not doing so. Responses included a lack of value for clients and trust in providers, failing to see the advantages over a good portfolio management system and uncertainty as to whether certain providers can sustain themselves financially.
"There has been some over-promising and under-delivering, meaning advisers have questioned who they trust and want to do business with," Thomas concedes. "Some have just switched off to wrap, while others need to shift their business model to incorporate it as it's all about formulating a more scalable business model.
"Some advisers are still commission-centric, meaning the two philosophies can easily miss each other, while others would simply point to the fact that wrap has some way to go to deliver all that an adviser wants."
However, the uptake of wrap does appear to be continuing as a third of those our survey found not using a wrap proposition say they are planning to use one within the next 12 months. "Some advisers and clients are daunted by the whole theory of products that have traditionally been dotted all over the shop now being in one place," says Martin. "It can be incongruous to them. It's all about continued communication from good advisers and providers that this does work for your business and what it does can be embraced whole-heartedly."
Another parallel between multi-manager and the wrap/platform market is the inevitable consolidation as the industry takes shape. Going by current usage, our advisers saw four main players in the wrap market - Transact (35%), Cofunds (20%), Skandia (14%) and FundsNetwork (7%) - yet a plethora of new entrants continues to be attracted to the market.
In Fisher's view, consolidation may still be a little way off. "As many of the big boys continue to add more wrappers to their platforms, the growing business levels will keep new entrants interested as they look for their piece of the pie," he says.
"What is starting to happen now is that many have been in the market for some time, meaning the barriers to entry have risen enormously. New entrants now have to look at themselves and ask whether they are fully committed to the market and if they have a business plan. It's an expensive industry and scale is essential."
Adds Thomas: "Many people feel it will boil down to about four or five entrants but my personal view is it won't get that low. Take the problems with life companies as an example - although there are fewer out there following a decrease in market inflows, there are still a fair number of scale players competing."
Even so, some significant events have taken place over the past 12 months that indicate some sort of consolidation. In addition to Amex's withdrawal from the market this time last year and the planned integration of Skandia and Selestia in 2007, another interesting event has been the genesis of a 'Platform Committee' - a development that has received mixed reviews. The committee, which consists of Cofunds, FundsNetwork, Skandia/Selestia and Standard Life, was set up to tackle some of the major issues in the growing wrap market. While it has attracted some flak for being exclusive from the outset, Thomas believes it will be seen to have a positive effect.
"There is a joint interest aspect," he says. "The world of wrap links us to the fund groups. While we have the ABI and the IMA as differing governing bodies, we need to look at issues that cover both. FSA rules have dictated groups need to look at how they operate and committees such as this help us look at issues covering the industry and how best to tackle them."
Martin, whose adviser-owned group Nucleus was among many wraps not invited to join the committee, offers a different perspective. "It is a strange decision to form a committee from groups who are not exactly bedfellows as many of the issues they are looking to tackle are not exclusive to wraps," he says. "Our own attitude is to ignore anything with the word 'committee' in it and focus on the issue of running a business to tackle these issues within the wrap space."
Looking ahead, many advisers on our panel saw a rosy future for wrap, provided improvements were made, although some felt the issues around cost, 'me too' offerings and lack of service could still haunt the market.
"On the whole, these vehicles will become easier to use as more wrappers improve choice for the adviser," says Fisher. "It has taken a few years for platforms to revolutionise the Isa market and, with all the issues surrounding life and pensions, the next five years could see them revolutionise the untapped retirement market."
While many providers strive to achieve the ultimate wrap model, should the UK market follow the course of its US and Australian counterparts, it could well be that wrap is not the final stage with Separately Managed Accounts or 'SMAs' set to spring up across these shores.
SMAs are designed to buy the underlying assets of a fund as opposed to the fund itself, meaning one only picks a manager's stock selection choices, rather than the whole package - thereby slashing the annual management charge on the wrap.
"While SMAs could be the next step in the market, the UK is not an exact replica of the Australian market, and getting demand for these products and the support of the fund management groups may prove a challenge," warns Thomas, however.
"We just need to continue evolving and improving the market. To do that, we need more tools to improve flexibility and functionality, as well as more wrappers and more investment choice in terms of funds. Then, if all these tasks are met, the key will be service and trust."
While most would accept that no complete wrap exists in the UK, the growth in the market and the speed at which providers are now incorporating new tools and features into their offerings means such a solution may not be far off. Indeed, with life offices unable to survive any longer on brand alone and the problematic issues surrounding compulsory pension propositions, wrap may not simply be beneficial to advisers going forward - it could be essential to the whole future of financial services.
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