The introduction of wrap platforms to the UK was hailed as an investment revolution, says Lincoln Collins, but have they delivered on their promise?
Since their UK debut in 2000, wrap platforms have been hailed as a possible answer to many investment needs. Taking the positive aspects of their US equivalents and promising benefits to all parties in the investment process, their introduction was heralded as a revolution that would change the nature of investment product wrappers.
Fast forward five years, and the UK revolution has not happened. While a wrap market is emerging, it is fragmented and, as yet, there is no consensus on the definition of a wrap.
The Hartford's experience is that UK advisers remain unclear about the benefits, function and importance of wraps. Datamonitor's definition of a wrap as a 'tool for monitoring and administrating private client portfolios' is useful, as is the assertion that a full wrap incorporates all of the following: all available tax regimes; full depth of allowable assets; a full suite of financial tools; online availability and a single transparent price.
Nonetheless, the UK is Europe's fastest growing wrap market, and with around 2,752bn held in potentially wrappable assets, the future looks promising.
The US perspective
The US wrap market emerged around 1974, and is today a sophisticated sector administering assets over $750bn. Since 1996, it has enjoyed increases of around 40% annually.
As a long-term US player, The Hartford has participated in the rise of the US wrap market. The US has a greater level of public awareness and interest in equities, so wrap products have been equity-focused.
US brokerage accounts were the original wraps. These accounts held client assets and provided front-end and servicing capabilities similar to UK portals and their online new business applications.
Historically, brokerage accounts held stocks and bonds for large stockbroking firms. As firms built mutual fund clearing houses, mutual funds could be added to the accounts, with the firms holding fund positions and allocating shares within the brokerage account system. Oeics were brought into the account through re-registration, new product sales and ownership of shares, with the broker making profit as an administration company.
Then, in the 1990s, investment bonds became available through brokerage accounts as insurance companies passed data via electronic data interchange, based on industry standard data formats. To compete with banks for investors' assets, larger brokerage firms also integrated cash management into their accounts.
Wrap fee accounts were established by larger stockbroking firms to offer key services, mostly to the high-net worth (HNW) end of the market. These services consisted of access to money managers - often boutique or speciality managers not available to retail investors - thereby giving the products an exclusive appeal. Also, a single fee was charged to cover investment management, trading and account administration, and advice and speciality performance reporting were provided, particularly around asset allocation.
The minimum investment in these wraps is around $100,000 per investment style, for example, US large cap, small cap, international equity. This is rather high-end and does not always provide the single diversified solution required by investors, so a hybrid wrap product evolved to allow for the value of the account, such that core investments would be held in a separately managed account and the diversifying investments held in mutual funds.
Further evolution in the 1990s saw the emergence of mutual fund versions of these wraps, offering the same four components: investment, administration on single asset-based fee, advice and high-end asset allocation reporting/valuations. A lower end of the market was targeted, with monies placed into branded mutual funds rather than with institutional asset managers.
Today both brokerage accounts and wrap fee accounts exist in tandem and are widely used, with administration remaining separate from the underlying platforms. For larger investments, there is a tendency among brokers to use brokerage accounts that can also include mortgage services.
Elements of both these account types can be found in the UK. Leading US brokers have shown that tied brokerage channels have strong potential for the development of wrap platforms, and larger international banks are already bringing their HNW targeted accounts over to UK shores.
UK wraps provide several benefits and in some ways are even ahead of their US cousins - for instance, different tax regimes cannot be mixed in the US. By enabling UK advisers to administrate clients' portfolios through a single entry-point system, wraps streamline monitoring and reporting processes, resulting in cost efficiencies for the adviser and end investor.
Wraps provide advisers with an array of investment information, analytical tools and tax planning calculators, and the fee-based remuneration provides a more consistent income than the patchy commission system. The single fee structure removes any commission bias that may move an adviser to recommend one product over another. And wrap statements provide investors with full portfolio visibility, supporting regulator calls for transparency.
However, confusion is occurring as players with different products define wrap in a way that best suits their offering. Some providers' 'wrap platforms' are simply rebranded fund supermarkets.
Advisers may be reluctant to place all of their business with one platform, or to start recommending a single product within each discrete investment category after years of using the full range of products from different providers. There may be discomfort during a transition from commission-based payment to a single-fee structure and also when switching customers onto a platform.
Participation in the UK wraps market requires significant financial and technological commitment, and players with greater budgetary constraints may fall behind.
Providers and advisers must find consensus on the issues and adapt wraps to UK specifics while also learning from US experience. Advisers could look to their US equivalents, who have successfully used these platforms for years by specialising in advice and investor solutions, rather than in products. Indeed, all UK parties will progress most effectively by specialising in what they do best, rather than trying to do it all.
Approached in this manner, wraps will improve efficiency and potentially cut costs. But they are not a panacea, and as with any financial offering advisers must continue to address the fundamental needs of investors, such as sound advice, asset allocation, risk management tools and reassurance of financial strength and service.
Our research has shown that advisers require greater levels of service, which could be difficult for many companies to deliver, particularly given the exacting standards demanded by a sophisticated wrap platform. Committed players can add value by providing legacy-free superior service that reassures investors the administration of their money is prompt, accurate and efficient.
No single solution can encompass an entire market's needs. Different wraps will emerge to serve the different needs of advisers and their clients. Some will be closed systems run by product providers, which by their nature will offer less market choice.
Lincoln Collins is CEO at Hartford Life Limited, the European arm of The Hartford. In April 2005 the company issued Hartford Gold, a flexible investment bond.
Collins was previously CEO at American Skandia, where he worked for nearly 16 years in a number of roles, including senior vice-president of strategy and development, senior vice-president of product management and vice-president of marketing.
Collins is a graduate of Trinity College, Connecticut, with a BA in History. He has an MBA from the Boston College Carroll Graduate School of Management and is a chartered financial consultant.
An ambitious objective
'Something completely new'
'Illusion of control'
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Total investment reaches £9m