Hot Wraps......

January 2007

by Jan Regnart CEO Wealthtime


I am sitting in a cafe writing this article, inspired by a poster displaying the words "hot wraps - fresh from the oven  naturally!"

We are certainly in an era of 'hot wraps'.

The problem is that the terminology is commonly used to describe many things both outside and inside the financial world.

On a well-known search engine, I recently noticed that even the name of our own company is included within an entry describing woollen shawls. It seems that artificial intelligence is also confused.

Everything is called a wrap nowadays. Within our own industry, wrap describes a multitude of different products and services. A wrap can be a simple tax wrapped product, a fund supermarket platform, a data aggregation service, an 'all in one' transaction service, a wealth management service and a discretionary fund management service -indeed, anything from a tax wrapper to a full back office open architecture wealth solution.

It would certainly have been more transparent if a unique name had evolved for each of the different types of wrap service thus allowing consumers and their financial advisers to immediately distinguish between all the different varieties. But wraps seem to have mutated into many forms since their conception.

And are wraps "fresh from the oven"?

Well there are certainly a growing number of providers embracing wrap or planning an imminent market entry.  Are they all expecting to serve up a fresh version of wrap or is their reason for market entry borne solely out of the fear of being left out in the cold? Are providers turning wrap into a comfort blanket?

The truth is that advisers no longer need to rely on traditional financial services institutions to build their businesses with wrap they are liberated and can do everything in their preferred way and so spend more valuable time with their clients.

Legacy institutions are fearful they will be left with a smaller role in the future of the pensions and savings market and do not wish to retrench into pure fund management or product manufacture.  Are they hanging on by their fingertips and hoping to stay in the service chain?  Once the advisers are wrap enabled could it be that the distribution prospects of the large traditional package product providers are seriously undermined? The banks will retain control of the end consumer market but could the traditional product providers lose control of the intermediary space, as intermediaries become wrap conversant? It seems that internal marketing departments are under enormous pressure to come up with the ideal wrap proposition and so more and more iterations are made regardless of investment cost and practicality. This is reminiscent of the era when the insurance company sector ploughed one by one into the estate agency market only for the majority to pull out a little while later when they realised the damage inflicted on their profit margins.

Could this mass wrap entry be the latest fad?  It cannot sit well with the prediction that only a handful of wrap providers will survive the massive cost of market entry and the operating costs of working in an open architecture regulated regime. Organisations may take years to see profits break even, if at all. The financial adviser owns the customer relationship and would no doubt wish his client to receive a first class service but could this service be provided via a specialist independent wrap platform or by outsourcing to a reputable administration house? After all, the adviser requires total focus on customer service and so the key requirements from the wrap provider are online functionality, accessibility and a first class administration service, not investment performance or product manufacture. The adviser relies on external fund managers and product providers chosen from the entire market to deliver the latter.

The whole financial services industry is changing. The balance of power is moving away from the established financial services companies. The concept of unbundling administration from the provision of investment fund management has continued the radical shift away from institutional product providers to independent administration platforms. This has in turn enabled the adviser to provide more bespoke advice and services, delivering solutions to the client in a more efficient manner. The Regulator has given the consumer much more control by forcing firms to disclose charges and commissions. As soon as there is transparency, there is choice. Regulation should enable consumers to understand their finances better. Customers can now vote with their feet by moving their savings and investments to those organisations that best suit their own needs and aspirations.

Will wraps end up being the "natural" way of transacting business? 

Existing institutions have enormous legacy books that could theoretically convert to funds under administration on in-house wrap platforms. Some wrap providers may consider providing incentives via fee reduction to advisers and legacy clients to encourage them to switch funds into the wrap in order to reach an early break-even point on development costs. Independent advisers must ensure that such a switch is in their client's best interests bearing in mind the other products and services available in the market and compared with the existing advice and solution.

The wrap proposition must work in harmony with the customer and the operation. If this is not achieved, problems will arise as volumes grow. Open architecture tends to be a bespoke environment and this in turn leads to either an over-engineered system or a manual back office. If the wrap operation is in anyway manual then each wrap acquired on the platform will increase losses due to the market demand for competitive fees and the flexible nature of the service. For wraps to work well, all parties in the chain must benefit.

Hopefully, the definition of a true wrap will one day be clarified so that the customer and the adviser can make informed choices. My favourite definition, at this instant in time, is "a transparent whole of market savings and investment facility enabling individuals to interact with their own wealth, in their own time, online." In the next instant, it will be a different definition but wrap is transforming the financial services industry and to be at the forefront of a revolution is exciting.

 

 

This article represents the personal views of Jan Regnart and is not intended as a substitute for professional financial advice


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