Bill Vasilieff, sales and marketing director at Selestia, believes the role of the old style life company is dead and the future lies with fund supermarkets. He predicts the wrap market will quickly grow in the UK once demand catches up with the supply
For the financial services industry - the world is changing. There are providers who have disappeared, who, on re-examining their business strategy have concluded there is no place for them in the new world.
The businesses that will survive need to ensure they re-engineer themselves to fit the new world. An example of this might be a fund manager who has given up on mass client administration and instead chooses to focus on fund management - thus leaving client administration and the retail distribution to the fund supermarkets.
There is little doubt that there is considerable space in this new world for the fund supermarket with an increasing amount being invested via this channel, rather than going direct to the fund manager.
Supply vs demand
But is the next step in this development the dominance of wrap - as has happened in the US and Australian markets? While there appears to be increasing supply entering the market, is there demand to match this?
In my view, the most remarkable aspect of the wrap market in the UK is that it has not taken off yet, despite the number of providers entering the market over the last few years. With one notable exception, the new services have universally failed to attract business on any sort of scale at all, at least so far. This flies in the face of experience elsewhere where wrap has become dominant.
One aspect of the market development so far seems clear, the proliferation of launches has been supply-led with no clear demand from investors or intermediaries. With more major players looking set to enter the market, the supply side of the equation will continue to grow as providers look for a stake in the market further down the line.
Wrap is not clearly defined. The old established life companies have become forced to re-assess their product offering. Their main product line, with-profits, has been found out and imploded. Other contracts like the mortgage endowment have rapidly disappeared, at least as a mass market ploy. They are left with the option of moving into exclusively protection-orientated space or going with the market into the new-style investment arena, the wrap market.
The problem is that demand is, so far, limited. One of the reasons I often hear is that the existing offerings either do not work due to technology problems or that they are just inadequate in their coverage of products and services. Until these inadequacies are fixed, intermediaries see little point in adopting the concept.
The final piece in this jigsaw is the public's widespread disillusion with the savings industry as a result of the numerous scandals involving pensions shortfalls, the technology bubble, mortgage endowments, with-profits failing to deliver and more recently the split-cap problem. It is no surprise given this background that the public has shied away from investing. The unfortunate thing is that there has been a rush into buy to let, which may well create another bubble.
Having painted this bleak picture I have no doubt that the wrap market will grow dramatically in the UK. I always think of wrap as a consolidation platform which delivers an efficient wealth management service to advisers and investors. In its simplest form, a wrap can be thought of as a fund supermarket and the major new entrants into this area have enjoyed dramatic success, at least in terms of attracting new business.
They have consistently suffered substantial losses - in part because they offer their services 'free' to investors and advisers. The fund supermarkets are already looking to extend their product and service offering and moving towards a deeper wrap model and there is no doubt they will take the market with them. Even in these early stages multi-manager platforms are already estimated to be generating nearly half of all future sales into the retail market with the trend rising rapidly. Fund managers are beginning to see platforms as almost exclusively their route into the retail market and are reshaping their business models accordingly. The downside of this is that total sales are still depressed and big prizes will be won by those that can re-invigorate the investment market and find a solution to replace the mass-market appeal of with-profits - although hopefully next time round the product will deliver what it says on the tin.
Looking forward to how the supermarket and wrap market might develop it is clear that the service providers need to get much better at wrap specification and the building process, and at using technology. Time after time we read about delays and failure to reach the market. This is because of a lack of understanding of the complexities and challenges involved in building a platform but also because of a lack of clarity and over-ambition on the part of those involved. The more ambitious the plans, the more likely it is that a proposition fails to make it to market; we see this happening time and time again.
To date the wrap players have stuck to traditional long-only fund management. We can expect to see the investment solution develop rapidly. A lot of thought is already going into how Ucits III funds can be used and going beyond that, the opportunities offered by wider alternative investments. This will be an exciting phase in the development of investment solutions in the UK as fund managers grapple with the challenges of new ideas to meet the needs of investors who have varying appetites for risk.
Of course, there are a wide variety of alternative investments on offer and many of the supposed 'hedge' funds do exactly the opposite and are particularly risky. This will prove to be a difficult area for advisers and one where providence can help, but we are also likely to see a concentration in the big name fund management groups. Anyone investing in an unknown Cayman Islands-domiciled fund run by a fund manager they have never heard of is looking for trouble.
Getting it right
The portfolio management tools will, in turn, need to become much more sophisticated to deal with the new investment solutions. The asset allocation tools we have seen to date have only had to deal with long-only investing. Developing tools which can model profiles will prove to be difficult and new thinking will be needed. Clients risk profiles themselves can be complex and holistic financial modelling is tricky.
Wrap development will drive the market to be much more concerned with portfolio maintenance than just setting up the portfolio. The result will be a trend towards more dynamic modelling with systems sending out messages to advisers following some trigger or another; for example a change of manager on a preferred fund, or a trigger point when the risk profile on a portfolio changes. In supermarket terms, the tools will be the equivalent of the dynamic shopping trolley which can pick and sift products according to preferences and risk.
Key to all of this is the intelligent use of technology. We live in an industry where margins are low and falling. Efficiency on the part of the platform and advisers will be crucial for survival as we will all have to live within a low cost base. Providers will need to be 'lean, mean and people unseen' with technology really doing the business with processes, while administration support staff spend their time with problem solving.
Straight-through processing will become the norm along with the elimination of errors and re-work in the business processing areas. None of this will work without the mass adoption of technology and those that cannot embrace this will die. There will need to be seamless links between the back offices of advisers and providers. This could be through providers taking over the provision of adviser back office systems, or possibly through collaboration between wrap providers and back office providers or through either party extending its offering into the others' space. Developing this technology is very expensive and risky and providers will need to ensure that the original business analysis lying behind this is rigorous, although business is by definition risky and potentially money may be lost.
Overall, I believe we have only just seen the start of the development of the wrap market in the UK as I see wealth management as a major growth area for advisers as investors become more wealthy and sophisticated and the traditional solutions disappear. Technology will be one of the keys to success but we are likely to see an over-supply by providers with inevitable fallout as some fail to find scale.
The old style life company has no future. This belongs to those with vision who are unconstrained by their own legacy thinking. The future lies with those who wish to work with advisers in building timely, successful business partnerships.
Wrap is the next development for the UK financial adviser market.
The wrap market is currently supply-led rather than demand-led.
Life offices are being forced to reassess their product offering.
Wrap providers need to ensure that their technology is fully functional.
Wrap providers are likely to branch out into alternative investments.
Wrap development will ensure a greater concentration on portfolio maintenance.
Wealth management will be a major growth area as traditional solutions disappear.
Industry Voice: Scottish Widows pension expert Robert Cochran and economist Andrew Scott discuss the future of employment and income, in episode three of Scottish Widows' podcast series.
What made financial headlines over the weekend?
Follows McVey's resignation
Schroders and Aviva Investors