Dave Ferguson of the Abacus claims the wrap market is being overrun with mediocre companies that command over-inflated prices
It seems that not a week can go by without yet another wrap provider proclaiming its entry into the market. In some senses this can only be good news as the sooner the market moves from a product-selling mentality to one in which the advice proposition is based around a service offering, the better, but I do remain sceptical over the merits of some of the new wrap entrants.
Not only is there considerable confusion around what actually constitutes a wrap but the market is further muddied by some of the fund supermarket providers seeking to step up to the wrap level.
Too many cooks...
To my mind a fund supermarket is an entirely different beast to a wrap platform. Little more than a dealing hub between distribution channels and asset management groups, a fund supermarket by definition is restricted to offering mutual funds.
While companies such as FundsNetwork and Cofunds have been extremely welcome market participants over the last few years I cannot help think that the transition to wrap may be a step too far. Not only do these outfits suffer from a lack of breadth in their investment proposition they completely fail to deliver on the transparency angle so key to a wrap proposition and indeed so important to the future envisaged by the regulator.
Bizarrely, the fund supermarkets have been encroaching on life and pensions' anti-transparency territory with the opacity of their offerings - goodness knows where the various life company/supermarket tie-ups will take us. One only has to reflect on Standard Life's stubborn refusal to disclose the true charges on their wrap to know that there is fear of the trust. It is only for so long that larger organisations can play the scale card when promoting fund management deals - after all they are only negotiating with the client's own money.
What you should get for your money
It is entirely clear that there should be three components of price for the investor - platform cost (to include product manufacturing), asset management and then financial advice. The last of these is simply a negotiation between client and adviser and should be well outside the scope of control of product providers while the former two are rather more commoditised and their pricing should reflect that.
In addition the artificial market control exercised by the supermarkets in areas such as the charge levied for shelf space and in particular the de minimus limits applied per fund or per fund group mean that the operators are guilty of perpetuating the big boys club that has come to terrorise the industry.
Surely it is clear to everyone that big is not necessarily beautiful regardless of whether one is discussing the mutual fund sector or the life and pensions groups. I would far rather see a market in which new and emerging participants were free to offer their products at a price of their choosing on the basis that the adviser and the consumer could judge where value for money might lie.
If I am an emerging group I may decide that my UK equity fund is worth 50bps a year rather than the 75bps cartel-ish number effectively offered by the fund supermarkets. I should be entirely free to promote my fund through mainstream channels without being penalised for being smaller scale.
Quality not quantity
Fund management skills should be measured by ability, expertise and performance rather than the size of a company's advertising spend. Of course in many occasions the two go hand in hand and that is fine, but the market remains flooded by mediocrity commanding a substantial price.
I wonder what volume of client assets are sitting in poorly-performing funds that have plodded along for years gradually eroding the value of people's net worth. Crucially I wonder how many advisers are on top of the situation with appropriate benchmarking strategies that are continually assessed and updated for appropriateness.
How many advisers are fully using asset classes such as investment trusts, exchange traded funds and passive funds? The full open architecture offered by a wrap offers all of this on a transparent basis and I just do not expect the self-interested fund supermarkets to be willing to play ball. Although significant assets are already invested with supermarkets I expect growth to stagnate as true wrap propositions gain momentum.
Ultimately all of the new technology we are beginning to see emerge will help and we can expect a significant realignment of the market. The opportunity for advisers is to embrace the concept over the next three to five years, engage with clients, create more durable investment portfolios on an appropriate platform and see the value of their business soar.
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