With the regulator publishing a glowing report on the influence of wraps in the UK and the excitement surrounding the launch of Nucleus, an adviser-led product, wraps are riding high
The launch of a new adviser-backed wrap platform coincided with the FSA issuing guidelines on the use of wraps in the adviser market. This shows the head of steam building behind wrap provision in the UK. Wrap provision represents a real opportunity for advisers, but after the Amex debacle they need to select their business partners with care.
The FSA was generally extremely positive on the influence of wraps in the UK market. The report stated that its recent research: "Did not uncover evidence that firms use wraps in an inappropriate way. In fact, when looking at wraps, the visits provided us with examples of firms working in the best interests of their clients."
High praise indeed from the regulator. It even went as far as to say that it felt the systems worked so well that it would not be introducing any wrap-specific legislation.
The FSA believes the chief advantages of wrap are the ability to view consolidated statements, flexibility and low-cost switching, access to a wide range of funds and the opportunity to access investment products at discounted rates.
This being the regulator, its praise was not universal. As disadvantages, it listed the fact that wrap costs are not always easily understandable. It made reference to stepped charges dependent on portfolio size and differential charges between initial wrap charges and ongoing charges. It believes that wrap charges may obscure the costs of the underlying products. It also says the wrap might be difficult to exit. It also attempts to have its cake and eat it by saying that advisers need to make clients aware that a wrap charge is a long-term cost. Presumably it is not advocating a return to hefty front-end commissions?
The report makes no mention of how useful wraps can be in transitioning an adviser's business from commissions to fees, but it does clarify what it means for the independent financial adviser. And this is a significant consideration in selecting a wrap partner.
As the FSA has hammered home previously, advisers must meet two conditions to call themselves independent:
1. The adviser must provide advice on packaged products from the whole market.
2. The adviser must offer the customer the opportunity to pay a fee for advice.
It defines 'packaged products' as life policies such as pensions and life insurance policies, collective investment schemes, investment trust saving schemes or stakeholder pension schemes.
The FSA report goes on to say: "Where a wrap offers only limited choice of a particular type of packaged product. You are unlikely to be able to rely on the wrap alone as a channel for purchasing that type of product for your client. So you will need to look at product outside of that wrap to offer a whole of market service."
This is significant. It means that advisers select a wrap offering full open architecture for underlying investment products, but the pensions and life wrappers of just one company cannot call themselves independent. This covers most of the life office propositions.
Of course, the way round this is to offer clients a choice of life/pension provider and then use the wrap from that life/pension provider on an ongoing basis. This is fine if an adviser wants to use a number of wraps for his business. But surely it is simpler to use just one wrap platform that offers open architecture both on the product wrapper and on the investment side?
As wraps usually offer plenty of customer relationship management wizardry around the sides, a single provider offers a great way to manage all client relationships.
Which brings us to the new launch from Nucleus. In fairness, it should be noted that chief executive Dave Ferguson has been a long-standing columnist for RealAdviser. However, as the first adviser-led wrap proposition, does it hold the golden ticket?
It has been set up with £3bn under management and seven adviser firms, and says it will offer: "Access to a universe of funds, tax wrappers as required and best in class technical, fiscal and legal expertise to generate greater alignment of interest between advisers and their clients." Ferguson says that the group's mission is to address the huge disparity between the value of the UK life sector (£100bn) and the IFA sector (£500m).
This is a lofty goal, but an important one. Ferguson aims to be working with 40 quality adviser firms within five years. The wrap will employ straight-through processing technology, wholesale investment fund pricing, leading portfolio management tools and advanced financial planning principles.
Vested interest or no vested interest, surely this must be the future for wrap provision in the UK, particularly in light of the recent FSA guidelines? Though not the first wrap provider to offer open architecture of both investment and product wrapper, it is the first designed by advisers for advisers.
This represents a real opportunity for advisers to emerge from the shadow of life offices. Clearly there will be advisers who feel comfortable with familiar brand names and prefer to stick with what they know. But they should be aware that - to some extent - wrap platform provided by life offices still exist to sell products. That feels a little old school, as advisers are increasingly focusing on holistic financial planning rather than product sales. It could be time to try something new.
Paul Bruns and Elaine Parkes
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