Providers that do not embrace technology will die, says Bill Vasilieff, marketing director at Selestia, and those that do survive will need to revamp their business in order to fully integrate themselves into the new financial services world
For the Financial services industry, the world is changing. There are providers, who, on re-examining their business strategy, have concluded there is no place for them in the new world and have subsequently disappeared.
Meanwhile, the businesses that survive need to ensure they re-engineer themselves to fit this new world. For example, a fund manager may choose to abandon mass client administration in order to focus on fund management, leaving administration and retail distribution to the fund supermarkets.
There is little doubt there is now considerable space for fund supermarkets, with an increasing amount being invested via this channel, rather than going direct to the fund manager. But is the next step in this development the dominance of wrap, as has happened in the US and Australian markets? And, while there appears to be increasing supply entering the market, is there the demand to match it?
Wrap, of course, is not clearly defined. The established life companies have had to reassess their product offering, since their main product line, with-profits, has been found out and imploded. And other contracts such as the mortgage endowment have rapidly disappeared, at least as a mass market ploy.
As a result, they are left with the option of moving into exclusively protection-orientated space or going into the new-style investment arena, the wrap market.
Reasons, I often hear, for why existing offerings do not work are technology problems or that they are inadequate in their coverage of products and services. Until these deficiencies are fixed, intermediaries see little point in adopting the concept.
The final piece in this jigsaw is the public's widespread disillusionment with the savings industry as a result of the numerous scandals involving pensions shortfalls, the technology bubble, mortgage endowments, and with-profits failing to deliver. It is no surprise, given this background, that the public has shied away from investing.
Having painted this bleak picture, I have no doubt the wrap market will grow dramatically in the UK. I always think of wrap as a consolidation platform that 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. However, they have consistently suffered substantial losses - in part because they offer their services "free" to investors and advisers.
Building a platform
Fund supermarkets are already looking to extend their product and service offerings, 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 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 total sales are still depressed, and big prizes will be won by those that can reinvigorate the investment market and find a solution to replace the mass-market appeal of with-profits.
Looking forward to how the supermarket and wrap market might develop, it is clear service providers need to improve at wrap specification, the building process and in using technology. Time after time we read about delays and failure to reach the market.
This is not only 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 a proposition fails to make it to market.
To date the wrap players have stuck to traditional long-only fund management, but 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.
Right tools for the job
This will be an exciting phase in the development of investment solutions in the UK, as fund managers grapple with the challenges in coming up with new ideas to meet the needs of investors who have varying appetites for risk.
Of course, there is 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.
Portfolio management tools will need to become more sophisticated to deal with the new investment solutions. The asset allocations tools we have seen to date have only had to deal with long-only investing. Developing tools that 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 more concerned with portfolio maintenance than just setting up the portfolio.
The result will be a trend towards more dynamic modelling with systems that send 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 that 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 because 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 and the elimination of errors and rework 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 the original business analysis lying behind this is rigorous.
Overall, I believe we have only just seen the start of the development of the wrap market in the UK. 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 oversupply by providers with inevitable fallout as some fail to find scale.
The future belongs to those with vision, who are unconstrained by their own legacy thinking, and those who wish to work with advisers in building timely successful business partnerships.
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