Uncertainty of definition, yet-to-be revealed software, business models as well as questions about ownership are just some of the issues swirling around the wrap platform market being pitched to IFAs.
The motley collection of factors mean there is uncertainty about just what wraps mean to the industry.
Thankfully, the issue has received at least some probing at the recent PIMS conference under the guidance of speakers Paul Bradshaw, consultant, and Malcolm Murray, head of sales and marketing Transact.
Lack of a single definition is perhaps the biggest problem when discussing wraps, admits Bradshaw, who says those discussing the issue can often spend easily half their meeting time just trying to agree on what is a wrap.
That said, it is better if this is not the case and IFAs and others use their time trying to decide what they want to do with the platforms on offer.
”My definition of a wrap is that of bringing private banking solutions to the mass affluent market,” Bradshaw says.
The problem for IFAs, of course, is that solutions for private banking clients may not be economical to a business selling lower cost products to the mass affluent, especially given IFAs are also trying to create individualised solutions from standardised products.
But, this would be to ignore some of the chief benefits of wraps, Bradshaw says.
With asset allocation at the core of investment advice, wraps enable IFAs to reduce the existence of “lazy assets”, that is those not producing an income for IFAs.
And because wrap platforms are bringing institutional approaches to the retail market, asset managers come under pressure to cut their prices: instead of charging 100bps, they are forced down to 15bps to 30bps – the sort of wholesale prices charged in the institutional space.
However, warns Bradshaw, it may the case that maximising advantage of this shift means IFAs becoming part-owners of the platforms they use.
“It is better in this environment to have a smaller slice of a larger pie,” he says, because a smaller slice of a bigger platform would generate better quality and volume of profits.
With ownership of platforms comes “ownership” of clients’ assets. The alternative is IFAs may face continuous struggles dealing with “exit issues” as ownership of platforms changes hands, through, for example, consolidation of platform providers.
Bradshaw predicts the number of “wrap propositions” may halve over the next few years – even though most offerings have yet to be launched in their full glory.
Of the “12 or 13 serious software projects” he has seen so far he would expect about half to survive – a survival ratio in line with any software development.
Malcolm Murray says it is “amazing” people are still debating the benefits of technologies that can provide online valuations, transaction histories and other solutions.
Just as support for these tools has grown, so too wraps will become more widely used, Murray says.
In the wider context, wraps will be able to increase the professional image of the IFA, increase profitability of IFA businesses, and help restore faith in the financial services industry amongst consumers, he adds.
Additionally, the technology should enable IFAs to improve their customer relationships by, for example, sending data such as transaction histories directly to clients’ homes through the internet.
The first step to adopting wraps should be to look for a low- or no-cost online based solution, Murray says.
With time use of wrap platforms should improve the quality of income and drive up the value of IFA businesses. They can also improve relationships by reducing conflicts between clients and providers because they can provide strong audit trails.
IFAs must remember, however, that adopting IT does not mean “removing the human touch at the coal face”.
”It’s a people business and many big banks have forgotten that fact,” he adds.
For example, staff taking telephone calls must be well trained to extract the full value of wrap services, Murray says.
Like Bradshaw, Murray says IFAs should not look for homogeneity in wrap propositions from different sources.
Solutions providers will look to the different IFA businesses with their different client bases, which means some solutions may be of the “plain vanilla” variety for Tesco, or may be targeting the high net worth individual market, requiring a full-service platform.
IFAs should also expect to end up using more than one platform, if evidence from Australia is anything to go by.
There, the mature wrap market sees the average IFA rely on 1.7 platforms per client as assets are shifted around.
Paul Bradshaw sums up the wrap debate by stating: “It is a strategic point when businesses will change in a very deep and fundamental way,”IFAonline
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