Wrap it up: the "Blackberry" of financial services?
LONDON (Reuters) - Mention the phrase "wrap platform" and, chances are, you will either conjure up images of rap artist Jay-Z on stage or be met with a blank look, but interest in these new financial management tools is growing.
Some say they are the future: the "Blackberry" of financial services where people can hold their entire portfolio -- their individual savings accounts, direct equity investments, offshore holdings, cash savings and self-invested personal pensions (SIPP) -- within a single product wrapper.
The benefits are plentiful: the ability to see all holdings, including a net total, at a glance; switch in and out of asset classes almost instantaneously; and view the value of holdings as they update in real time.
Others, however, warn that the additional layer of costs often involved make this a viable option only for the most sophisticated investor, and that the technology is not yet developed enough to make the platforms fully effective.
Until recently, wraps were little-known in the UK, even in financial services circles. Only a few years ago, independent financial advisers (IFAs) wanting to offer their clients a wrap proposition had few choices: Transact, Skandia, Selestia and Cofunds. (Skandia merged with Selestia last year after the former's acquisition by Old Mutual.)
Interest in the area grew, though, following a damning report by independent insurance analyst Ned Cazalet into the lack of profitability in the insurance sector.
In the Scottish Life-sponsored report, "Polly Put The Kettle On", Cazalet said re-broking existing business from one provider to another cost the industry around 4 billion pounds per year, as pensions providers saw money walking in one door and out of another, with no good justification, every two or three years.
"It made businesses think about where they sit in the value chain: do they run funds or provide product wrappers, or is there more margin in being the enabling system" Shaun Sandiford, director of key accounts at James Hay, the wrap and SIPP arm of Abbey, told Reuters.
Other firms -- both independent players and life companies -- soon got in on the act, and along came Fidelity FundsNetwork, Vantage (from independent financial services provider Hargreaves Lansdown) and Standard Life, as well as James Hay.
The "wrap" brought with it a whole new lexicon: of "platforms", "guided" or "open architecture", and "bundled" or "unbundled" pricing.
Such products can, essentially, be illustrated by way of various analogies; with a wardrobe, television set or Blackberry. Would you buy a new wardrobe every time you buy a new skirt or dress, or just an infinitely expandable wardrobe in which to put new purchases?
Drawing an analogy between television sets similarly illustrates the point. People with simple financial affairs and little in the way of investable assets might require the financial equivalent of a portable television set with five terrestrial channels.
Someone with, say, less than 100,000 pounds to invest might require the equivalent of a widescreen television with a Freeview set top box, giving 50 channels or so. This might be a "fund supermarket", which, as the name suggests, is analogous to grocery supermarkets, and allows consumers to buy a variety of funds from different providers at one central location.
Others, however, might have more sophisticated 'television viewing' requirements, and might plump for a plasma television with a high-definition Sky box, giving access to 500 channels, with 35 news networks and so on.
This, says Sandiford, is akin to a wrap platform, which gives access to all tax wrappers, a huge choice of funds and a full SIPP, including the ability to invest pension fund assets in property.
"Wraps aim to address that 'shoe box moment' when someone turns up at an IFA and empties a shoe box of documents on the table and says: 'Can you look after all this for me,'" he says.
"They're something of a Blackberry solution: just as this technology allows you to hold all your emails, text messages, address book and so on in one place, wraps let you do the same with your financial products."
There are some important differences between platforms.
Some operate a "guided architecture" structure, offering investors a limited, albeit often huge, range of funds while others operate an "open architecture" administration service -- giving investors the run of the entire market.
Some providers levy fees every time an investor wants to switch money from one fund to another; these fees come over and above the initial and annual management fees charged by fund managers. Others operate "buffet pricing", charging an annual sum, usually a percentage of monies held, irrespective of how often money is moved about.
Then there is "bundled" and "unbundled" pricing: the former bundles the cost of the wrap and the underlying fund management fees together, the latter does not.
City watchdog the Financial Services Authority said in March it remains concerned about a number of potential risks highlighted in a discussion paper on platforms: that they might lead to increased complexity and costs for consumers without new -- or valued -- services being received in return.
Many wrap providers have, however, negotiated discounts with fund management groups: some platforms take the savings for themselves, others pass them back to the consumer.
Bargaining power is also allowing platforms to access institutional rates for retail investors -- a practice becoming more prevalent as the wrap sector grows, says Mark Polson, head of communications for Standard Life's platform business.
As the market expands, financial advisers have increasingly turned to wraps to house their clients' portfolios, attracted to their use of technology to improve efficiency and cut costs.
Some 23 percent of advisers now write more than 80 percent of business through a platform compared with 18 percent last year, according to research firm Defaqto.
Consider the practicalities of holding all investments in one place -- rather than having to search through piles of statements and valuations from different providers -- and the speed at which changes can be made to portfolios, and it is easy to understand this increase in popularity.
Wrap accounts allow investors to rebalance their assets to suit changing market conditions with ease -- important amidst volatile markets.
"In the recent market conditions, this flexibility has been a Godsend: investors have been able to move around their portfolio and react to the market by making one phone call or going online," says Ben Lundie, head of development at Vantage.
But the market is not without its problems.
Some providers have been forced into re-launching or withdrawing their products as the market hots up. American Express withdrew its UK wrap some 18 months after launching; James Hay relaunched its offering in 2006 and in May last year Norwich Union announced that it was closing its "Lifetime" wrap to new business while it makes major changes to its proposition. The provider said it needed to improve speed, while cutting down on errors.
There is a question, too, over independence from insurers. That has given birth to wrap platforms owned by IFAs: Edinburgh-based Nucleus launched in the summer of 2006, while Ascentric launched to the whole IFA market in January 2007 after a soft launch the previous year.
David Ferguson, chief executive of Nucleus, told Reuters: "Wraps empower the consumer and adviser like never before, but good quality advisers recognise that their job is to look after their own clients' propositions, and if an insurer owns the key to that, there's a lack of control."
Nucleus signed up Westminster Financial Planning (WFP) to its platform this month, taking the total number of firms to 50 and individual IFAs to more than 230.
"We have worked hard to build a reputation for being truly independent and it was imperative our chosen platform complemented this," says WFP's managing director Mike Beckwith.
But there are other issues with platforms regardless of ownership. Consolidating assets into a wrap in the first place can prove "quite painful", says Ferguson, while "re-registration" -- moving assets from one platform to another -- is almost impossible, because platforms and fund management houses use technology run on different trading standards or lines of communication.
In specie transfers should become easier after a landmark agreement between members of the UK Platform Group -- including Cofunds, FundsNetwork, Selestia and Standard Life -- in September 2007 to work with their technology providers to improve the situation.
But some say such technological difficulties are one reason why wraps, as they stand, deliver greater benefits to intermediaries than their clients.
Lee Smythe, director of financial planning at independent financial services group Killik, says: "It's alright if you're doing new business and setting up on a wrap platform, but some platforms simply can't deal with legacy business.
"Someone who's got (investment) plans here, there and everywhere and it's still appropriate for them to hold them could find it difficult to get much benefit from a wrap."
Others say such snagging issues are no reason for investors to take a back seat.
"For me, it's a bit like the alphabet: if you want to write beautiful prose you need all the letters in the alphabet," says James Hay's Sandiford.
"Yes, the technology has to be constantly improved, but look at Windows: it's been through so many versions since 1985.
"If you said: 'I'll wait until Windows gets it right' you'd be waiting forever."
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