Wrap - one platform an insight for intermediaries

 

January 2007

 by Jan Regnart CEO Wealthtime

 


Yet another large financial institution has recently confirmed that it will not be creating its own Wrap platform but will look to invest in an already established independent external wrap. They believe that it is a mistake to lock intermediaries onto a platform and that offering single products goes against the ethos of open architecture. This stance follows the FSA's comment in its recently published study that advisers are at risk of becoming tied if they use a single wrap platform that has a limited amount of products on offer. However the FSA has now clarified its thinking on this.

Last month's industry commentators seemed to have misunderstood the meaning behind the FSA's report. Without a closer scrutiny of the report itself, their comments could cause some intermediaries to think twice about moving their business onto a wrap platform.

Those commentators seemed to assume that, in reminding the intermediary that true independence requires them to choose the individual products held in a wrap from the whole of market for such products, the 'Frequently Asked Questions' section accompanying the report placed tax-wrappers in the same category as stand-alone financial products. However, the definition of 'product' given in the same document did not necessarily support that assumption at all.

I do not consider the requirement to be a problem with regard to those providers offering a full open architecture wrap since these give the widest possible market access and most provide wrappers free as part of the service. Some providers do not charge re-registration fees, dealing costs or exit fees which also strengthens the case.

But the Regulator's study took into consideration today's entire wrap market and, while the tone of the paper is very positive, it raises several questions which are important for the industry, for intermediaries and for the future of wraps.

First, the study found that complex and opaque charging structures are widespread. This is disappointing as surely the key features of a true wrap are simplicity, transparency and fair charges.

Also given the variety of platforms on offer and the varying degrees of open-market access that they permit in conjunction with the absence of any common charging structure, these factors make effective comparison between wrap providers extremely difficult. It is therefore unsurprisingly difficult for the Regulator and the industry to compare like with like.  Wraps arrived in the UK from the already mature US and Australian markets. Much of the UK industry seems to have developed totally new versions, tailored to the providers' own perspectives, resources, and areas of specialist expertise coupled with traditional, product-based, approaches to charging. The result is a disparate market with no accepted standards for the wrap concept.

In addition, a further concern is that, should the client and/or intermediary no longer 'wish to use a specific wrap, they may not be able to exit easily if the client has invested in a product or tax wrapper that is specific to that wrap. This is certainly something wrap providers need to consider when designing products within their wraps, as it is essential to allow clients freedom of movement between wrap providers. My view of a true wrap is one that makes individual product considerations unnecessary. Instead, it gives the intermediary freedom to follow investment strategies that meet the client's financial needs and attitude to risk. Wraps should include wide ranging access to the universe of funds and investments and should have simple and transparent charges with no exit penalties.    If these criteria are met, the intermediary can easily make cost comparisons when recommending the wrap provider. Individual wrappers then become advice-neutral and purely a form of facilitation and communication for the client, so the need to switch wrap providers comes down to the service provided.

On their recent visits to various Wrap providers in the market, the FSA found that the industry was acting in an appropriate way and in the best interests of the client. The FSA maintains a fairly close 'watching brief' to ensure that the standards set so far are maintained.

The FSA has now clarified its position on whether using just one Wrap platform means an intermediary is tied. They have pointed out that as long as the intermediary continues to bear in mind what is available in the market, it does not matter if the intermediary puts a high proportion of business on one wrap as long as it is suitable. It also does not concern them if an intermediary chooses one or several wraps as long as it is right for the client. The adviser must ensure placing the client's assets on a wrap or supermarket platform is in the client's best interests and suitability can be shown.

Conclusion
As long as the intermediary is aware of developments in the financial services industry in relation to wraps and can show any decision to place a client on a particular platform is appropriate to their needs, there is no requirement to limit the amount of client assets which could be placed on one platform. This insight into the Regulator's thinking will provide useful advice for intermediaries as they contemplate using the wrap concept to transform their business model to enable clients to visualise their wealth.
  
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This article represents the views of Jan Regnart and is not intended as a substitute for professional financial advice.


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