Life Under Wraps
by Martin Davies
Published Winter 2007/2008
A number of Life companies are looking seriously at wraps. Some, like Friends Provident and AXA, have already publicly committed to launching their own wrap proposition thereby joining Standard Life and NU as premier league Life companies operating in the emerging wrap space.
As the number of wrap service providers grows, the question is why are Life companies taking this so seriously? The simple answer is they are concerned that their industry dominance is under threat. With the demise of with-profit funds, Life companies are now having to offer open architecture investment products with a wide choice of third party funds. In effect, this model requires the Life company to merely provide and administer the associated tax wrapper and therefore reduces their role to nothing more than a convenient means of achieving tax relief. However take a different model where the Wrap service provider is also the source of the tax wrapper and it’s clear that the need for the traditional Life company will disappear.
Transact, the longest established independent Wrap service provider in the UK has already created just such a model. With the use of UK and offshore subsidiary companies, Transact provides the wrappers for personal pensions and onshore and offshore bonds. With one less mouth to feed in the distribution chain there is a different dynamic to how the fees or charges are shared.
That said, the question is how real is this perceived threat to the life industry? The answer lies, to an extent, in the degree to which the intermediary market adopts the emerging UK wraps proposition. At the moment, wraps is synonymous with fee based financial planning for high net worth clients and those at the upper end of the mass affluent. This represents around 3% of UK investors and y% of assets. There are clear potential advantages to an IFA if they adopt wraps – easier administration, consolidated reporting, more time for clients and business development – but take up in the UK has been slower than predicted. Does this mean that wraps have only a limited appeal and that the traditional IFA/Life company model will live on? The answer I suspect in the short term is yes. Over the longer term the benefits of wrap will I believe prevail even for the mass market where IFAs will derive benefits regardless of the segmentation of their client base.
So the Life companies may not be under immediate threat from wraps but nevertheless over time they could become vulnerable – particularly in a market where the Life companies are under pressure to reduce costs, clarify their objectives and increase distribution capability. As a pre-emptive strike more of them will, I believe, decide to act sooner rather than later and launch a competitive wrap service. But if and when they do, can they attract sufficient of the IFA community to make it viable in what could become a crowded market.
Some of the current wrap propositions are clearly positioned to support IFAs targeting fee paying high net worth and mass affluent investors. A strategy to support IFAs regardless of the level of sophistication of their client base could be the answer for new entrants. After all, today’s product buying client is potentially tomorrow’s sophisticated investor. By supporting the IFA to service their clients at the start of their investing journey and to seamlessly facilitate and support the investor’s development into ‘manhood’ and thereby benefiting from the wrap service model, could be a key future differentiator.
The current UK wrap model is clearly focused on the IFA market and this is therefore the principal dependency for its success. There have been numerous concerns expressed about the willingness of investors to pay an additional fee for a wrap service. This raises an important issue about how the UK positions the service to investors. We can turn to Australia to help us answer this particular challenge. The Australian model in no different to that emerging in the UK except that there is a significant difference in the underlying culture of advisers and investors. Australians perceive there to be real value in the service provided by their advisers through the use of wrap services. Advisers are, in the main, highly regarded by Australian investors – and of course there are many of them due to compulsory superannuation. Advisers leverage this regard to promote the benefits of wraps and investors are happy to pay a premium to reap these perceived benefits. Attitudes are clearly somewhat different in the UK where consumers typically accept the ‘invisible’ commission hit rather than seeing real money go to the adviser in the form of a fee.
So if support from the IFA community is a critical success factor, how will the Life companies who enter the wrap market gain critical mass. Brand is probably no longer the differentiator it used to be – after all in an open architecture model it’s the underlying fund managers’ brand and performance that will reflect the quality of the IFA’s advice and recommendations. It’s that other historic differentiator, service, that will determine the winners and losers. Wrap service provision starts from the moment an IFA signs up for the service by providing help and support in establishing the processes, controls and technology links necessary to achieve the benefits sought by the IFA. The ability for the IFA to white label the service is also key so that the IFA’s clients can attribute the quality of service directly to their IFA thereby enhancing their relationship and making it easier to justify any wrap related fees.
But what of the Life companies that don’t choose the wrap route or those that lose out to those that emerge as market leaders? One of the biggest assets that Life companies have is their administration capability. Could we in future see a number of them becoming low cost administration hubs providing services to their peers and leveraging their combined scale to further drive down costs and thereby address one of today’s key challenges.
Whatever happens, its clear that the traditional role of the Life companies will change. Wrap may be a catalyst for this change but there are other forces also in play. Doing nothing is not an option – every UK Life company must have a defined strategy to underpin their chosen path and ultimately their survival.