Earlier this year Dunstan Thomas ran two parallel surveys based on the impact of wrap services. The first focused on providers and administrator firms and the second on financial adviser community. Chris Read, summarises the key findings.
More than a third (37%) of the retirement planning-focused adviser community think wrap platforms will have the most significant impact on the pensions market this year, ahead of innovation in SIPP products (23%) and anticipated enhancement of existing legacy pensions schemes (21%). Yet despite wraps sitting very close to the top of advisers' 2008 agendas, the provider community is proving more reticent – only one in ten of providers and administrators saw supporting wraps as the key route to growth this year and only 7% believe wraps have reached a stage of maturity where they are truly 'doing the job for advisers'. That said, providers are preparing for wrap in a number of ways.
The majority of providers (41%) are seeing platforms as methods of distribution of their products and are therefore 'ensuring as many products as possible sit on as many platforms as possible' this year. Nearly one in five (18%) are building their own platforms this year. Six per cent have instead chosen to take a stake in a wrap platform or wrap technology provider. Despite this activity over a third of providers and administrator firms (35%) are still researching the market opportunity. Although this figure has fallen from 46% in 2007 (when we asked the same audience the same question a year ago) it does indicate that the provider community is not driving wrap platform adoption and if anything it is being dragged in that direction by the adviser community.
Why then are providers and administrators dragging their feet on wrap migration? Interestingly, the main reason is the perceived technology challenge of gearing up for wrap. The most significant concern, as stated by this group, was 'the high cost of technical work'. The next largest concern was 'the risk of IT project failure was…too high' and more specifically perceived problems with 'integration between wrap platforms and advisers' front office/desktop applications' (these last two had equal response ratings).
Taking a step back from these findings; now that Dunstan Thomas has worked alongside both wrap platform providers, wrap technology companies and providers themselves over several years; we can say with some certainty that the scale of the wrap IT challenge is not too high. Even the best platforms in the market today have had no more than £3 million spent on them, often over several years of development.
Consider also the huge strides that have been made in recent years in integration technologies which make wrap integration with existing provider and desktop applications relatively short work. Providers' IT concerns are based on a misplaced belief that they need to invent their own handcrafted wrap solution. This 'flying solo' approach is high risk, expensive and also unnecessary, given the amount of expertise that is already out there for sharing. The real success stories will be those that have a clear vision for what they want to achieve with wraps and then are prepared to use existing components and expertise to help them build the systems to enable that vision.
More positively, 50% of providers already think that integration technology generally, and wrap technology provision specifically, has improved in the last year.
The key factor influencing wrap selection was specifically evidence of 'strong security to prevent hacking and unauthorised usage' (with 3.5 concern rating out of 10); while 'real time valuation of assets' and 'online transaction capability' came in equal second.
The general feeling that came through in responses to Dunstan Thomas' provider survey was that providers see supporting wrap as far from the only game in town this year. For example, 42% see 'services innovation' as one of the key opportunities for growth this year.
Anecdotally Dunstan Thomas is seeing a lot of provider resource going in to developing tools for better advice focusing on taxation reduction calculators and portfolio planning tools. Others (21%) are taking advantage of this turbulent market to acquire or partner with others to get ahead. Some 16% are looking to develop new products and a further 10% predict that its key opportunity for growth this year will come from strategic outsourcing. With all these considerations on the table, providers' IT heads are unlikely to be wholly focused on taking advantage of wraps.
Advisers, by contrast, are expecting that wraps will be a core focus for them this year. Most adviser firms Dunstan Thomas polled were planning some migration of customers onto selected wrap platform(s) this year. The majority (52%) were actively revisiting 'selected clients' to assess whether to move them onto a wrap. A quarter are migrating only new clients this year; while 19% are revisiting all clients to assess whether to move them.
Although there is clear enthusiasm for customer migration to wrap, Dunstan Thomas strikes a note of caution in the way in which this is being done. The survey indicates that nearly three quarters of IFAs (71%) may be in breach of Treating Customers Fairly (TCF) by selecting specific groups of customers to migrate to wrap rather than explaining the pros and cons of wrap to all customers and helping them to make the right decision for them. A recent comment on this issue by a spokesperson from the Financial Services Authority (FSA) underlined concern around customer migration strategies of adviser firms: "If advisers do not offer wrap when it is considered to be suitable, that may call into question the suitability of their recommendation."
Some of the reason for some advisers only transferring new clients into wraps may be to do with the burden of transfer of existing assets into wraps. On this the FSA spokesperson noted: "We do recognise the burden of the transfer but if there is an ongoing relationship with the customer the adviser must meet all TCF requirements." The FSA is about to start a review of wrap platform usage.
Despite this potential concern, the benefits of wrap are coming through loud and clear for the adviser community. The vast majority of advisers see wraps' 'ability to apply holistic asset allocation, selecting the widest possible range of investment types and a range of tax wrappers' as the key advantage (with a 2.82 out of 9 rating). The next most significant advantage (with a 3.83 rating) was seen as 'explicit and transparent charging' while the third most significant advantage was creating 'much needed efficiencies and reducing administrative burden of dealing with providers direct.'
Not surprisingly, given the importance placed on a good choice of funds and tax wrapper types, the existence of a good choice in these areas is the primary consideration when selecting wrap platforms (for 45% of the sample). Following on from this 17.5% most wanted to see 'clear evidence of strong administrative systems sitting behind the front-end enabling crucial integration with existing desktop-based systems.'
The wrap concept may finally have come of age, primarily because the emergence of SIPPs and other complex pensions into the mainstream has created the need for an advice and transaction platform which brings together lots of different types of assets into one place (28%). Others simply think wrap platform providers have finally reached a stage of maturity where they can do what advisers need them to do (26%), despite only 7% of providers thinking that this tipping point has arrived.
Despite the clarity that advisers' had in areas like criteria for wrap selection and customer migration strategies, only just over a third (a total of 37%) have already signed up to a single wrap platform (17%) or several wrap platform providers (18%). But perhaps most interestingly the same number again (37%) are planning to sign up to wrap(s) this year. Such is the anticipated success of wraps, only 8% of the sample said that customer migration onto wraps was not on their 2008 business plans.
Further to this, over two thirds (69%) said that they would be using wrap platforms for investment management this year, while 58% would use it for financial planning and 60% expected to be transacting business through a wrap. 59% also expected charges associated with using a wrap to fall this year, presumably as more subscribers create economies of scale and platforms jockey for position in the growing market.
Echoing provider IT concerns, the only significant deterrent to wrap adoption from the adviser perspective was 'anticipated ineffectiveness of integration between providers, investment managers, administrators and platforms themselves' (36% said this was the key problem). Linked to the integration concerns was the specific worry about the 'lack of electronic standards for movement of data to enable wraps to offer real-time multi-asset valuations' (13%). A similar number (15%) focused on the expense of doing business via wraps stating that 'high Total Expense Ratios (TERs)' will hold back wrap adoption.
Broadly the findings are good news for wrap platforms providing they have built up their offerings effectively. If they offer good product and fund choice; a good range of advice-driven tools; strong security and administrative capabilities; and are not too expensive, then they are looking forward to a very bright future over the coming months and years. There are some indications that providers need to move faster to support wraps as the 'Year of the Wrap' appears to be upon them. To do this there is clearly a need for them to look closely at what best practice is already out there and consult with experts to fast track their wrap support projects.
Dunstan Thomas commissioned Matrix-Data to conduct parallel surveys of both 3959 financial adviser firms and 183 provider and administrator firms, in the retirement planning market. Both surveys were distributed electronically on 11th February 2008 and ran for 10 days. Response rates were 2.4% and 15.8% respectively. For further details please go to www.dthomas.co.uk/imago/administration/extender or call on 0239 282 2254
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