Fund supermarkets have gone from a standing start in 1999 to being an intrinsic tool in most advisory firms today. But of the many that have launched since then only a few remain as those without deep pockets have struggled to compete. The fund supermarket business is now set for its biggest shake up yet as the emergence of wrap disrupts its fund distribution hegemony. This month's survey looks at the outlook for fund supermarkets in the UK. Why have they been so successful? And what impact will wraps have on their position in the market?
With 90% of advisers now using fund supermarkets to transact part of their investment business - compared to 88% in 2005 - there is little room for the stellar growth of the early years of fund supermarkets. Though the survey indicates that 65% of advisers transact more business through fund supermarkets than they did 12 months ago.
Rob Fisher, head of marketing at Funds-Network, says: "Supermarkets (more appropriately called platforms now) now dominate adviser Isa distribution, and
legacy Pep and Isa re-registration onto platforms is the norm. The largest services, like FundsNetwork and Cofunds, already have around £8bn in assets under administration each and are growing exceptionally quickly. The last year has seen
both platforms move into the life and pension space, through offering investment bonds and Sipp wrappers too."
Ian Thomas, investment marketing man-ager at Skandia, says: "Fund supermarkets are definitely still growing in popularity. More and more advisers are starting to
understand the significant benefits of holding clients' assets on a single platform. The benefits include things like; reduced administration costs, enhanced quality of service, consolidation of trail commission, and
ability to switch funds quickly and cost-effectively. Recent data from the IMA suggests that the most popular distributors of Isas in March 2006 were fund supermarkets, accounting for £447m of gross Isa sales, followed by tied agents representing £298m."
Advisers cited switching, easy reporting and convenience as the main reason for dealing with fund supermarkets rather directly through fund companies. Fisher believes all this is just par for the course. He says: "As a service, successful platforms must offer efficient service for advisers, a wide range of funds and providers, access to all major wrappers including Sipps and bonds, plus effective decision-support tools. More strategically, platform providers need significant financial resources, expertise and real long-run commitment to the platform marketplace."
Service is undoubtedly a part of the appeal of fund supermarkets. Efficiency and reliability are vital for the credibility of fund supermarkets and it is no surprise that Cofunds, Skandia and FundsNetwork are seen as the best service providers by the advisers surveyed. Anthony Wolfe, strategic development director at Cofunds says: "You've got to have a scalable IT platform that's proven. You need a good customer-facing process as well as an understandable system that is accessible via the web and over the telephone."
Fisher adds: "For customers, platforms must offer a straightforward service which can give them the information they want, but - more importantly - helps their adviser to do more for them. For advisers, platforms must make life more efficient for adviser firms and the people that work for them, be they the owner of the firm (who may need management information support), advisers (who will be looking for efficient new business submission) or administrators (access to client information, reporting and efficient problem resolution). Of course, it can be difficult to achieve all of this, all of the time, but this must be the overriding aim for any service provider."
Thomas says: "You have to offer an efficient, professional and helpful service to both advisers and clients. There are a whole raft of qualities needed to achieve this, including strong regional support, a dedicated helpdesk for advisers and clients, an efficient administration process, e-business tools and client online services. If the company is offering a good service, then this is recognised through industry awards and, more importantly, in the feedback from advisers."
But with wrap moving into the mainstream, what is the main theme for fund supermarkets in the next 12 months?
Will they move towards a wrap proposition or maintain a distinction? Fisher says: "The development of life and pension wrappers and the launch of next-generation online planning tools will be the main themes. For instance, we now
offer a Sipp, an onshore bond and new portfolio planner tools. Supermarkets have become 'platforms' and are now competing head on with 'traditional' life and pension companies."
Wolfe adds: "The addition of life and pension wrappers has been a major step forward in the past 12 months, but equally important is the growing acceptance of fund supermarkets/platforms as a proven business model."
Advisers use a variety of products and wrappers on a fund supermarket. Unwrapped funds proved the most popular with 46% of advisers asked currently using them. This was followed by 42% selecting equity-based products and 39% using investment bonds. A further 49% of advisers said they were planning to use investment bonds at some point in the future.
The biggest bone of contention in the report was the question of wraps and their growing influence in the market. Only 56% of advisers agreed with the notion that fund supermarkets will need to develop into wraps in order to survive.
There are arguably three independent wraps in the market (7IM, FundsDirect and Transact), while Abbey, Lifetime and the recently launched Standard Life wrap are run through their respective life offices. Advisers saw access to the range of tax wrappers, investments and fund managers as the main advantage of wraps over fund supermarkets.
Fisher says: "Different models will emerge. The benefit of the supermarket model is simplicity and lower charges. So for some customers and advisers, this will remain the ideal model. Wraps are more comprehensive, yet complex. Early wrap services seem to be quite expensive for consumers. Over the long run, there's no contradiction in a platform offering a supermarket-style service alongside a fuller wrap proposition."
Indeed, wrap may be more suitable for fee-paying or advice-based clients, while fund supermarkets remain more suitable for commission-based or transaction-led clients. Thomas says: "The fund supermarket offering is a core part of a wrap offering. It could be seen as a stepping stone, which certainly seems to be the case with many players in the industry today."
One transition which has taken place is the adoption of the term 'platform' from fund supermarket. Both FundsNetwork and Cofunds now see themselves as platforms and are positioning themselves as a hybrid of fund supermarkets and wraps. Wolfe says: "It's all to do with language. The development of the term platform is an extension of a fund supermarket but by the same token it gives recognition for the administrative support model we offer advisers."
Thomas adds: "To a certain extent the term 'wrap' is interchangeable with a well-developed platform. Platforms offer a service facility to advisers, and can be defined as a multi-product, multi-service facility that offers both investment flexibility and access to a wide range of externally-managed funds. It also offers comprehensive online investment and client servicing tools. Fund supermarkets also provide a service facility and are a type of platform. But this is generally limited to just Isas, Peps and unwrapped unit trusts or Oeics."
Thomas says that although the US and Australian markets are good forecasts for what is to come in the UK, they should not be treated as gospel. He says: "The US and Australian markets provide a useful example of how a shift in advisers' business models towards recurring revenue has been supported by platforms. In other ways, however, straightforward comparisons with the UK are unhelpful. For example, the distribution structure and product framework in these countries are fundamentally different to the UK."
Wolfe agrees that there are resemblances but believes it is largely a different proposition. He says: "The whole wrap proposition in the UK is completely different, particularly to the situation in Australia where the key driver was the introduction of compulsory state pensions. This in turn introduced greater transparency and allowed those with deep pockets to deliver in a market that largely became a no-lose situation. But despite the differences, we can still learn from what has happened."
One of the biggest news stories of the past 12 months was Amex dropping out of the wrap market. Thomas says this was a classic example of both market competition and increased barriers to entry. He says: "The platform market is competitive and not all will be successful. Although in the case of failure, client assets should be protected; there is nonetheless a lot of upheaval (and cost) for advisers in moving client assets to a new platform.
"It is therefore crucial for advisers to view their choice of platform partner with a long-term perspective. A successful platform has to have numerous features including a strong commitment to the financial adviser market. Other important features include a track record for investment to stay at the forefront of platform development, high service standards, a track record of e-commerce delivery, strong fund manager relations, a scalable and efficient processing capability and scale in terms of asset management."
Despite their success, advisers would still like to see numerous changes made to improve provider offerings. Major themes that appeared included the need for cash accounts, improved reporting, more funds readily available and more transparency. Fisher says: "Improvement will continually be made on these platforms. Next steps for FundsNetwork will be looking to add new components such as cash management, offshore wrappers and more planning tools - for example, retirement income planning)."
Wolfe adds: "While the market is constantly changing we have now reached a point where the market finally understands the pensions situation and while we continue to improve all our facilities a lot of our energy will be going into that."
Thomas believes there are other areas that need to be looked at. He says: "Fund supermarkets should offer clients the ability to re-register mutual fund holdings off their platform to another provider.
If the client has to sell the holding they could incur a CGT liability, which is unfair for the client. Fund supermarkets will continue to develop and offer a wider choice of product wrappers. As technology progresses so too will the e-business solutions they offer, and in the tools they have available to the adviser pre and post-sale."
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