Wrap for the UK: 'when' not 'if'
by Ed Holt, Managing Director,
Aqera
Published April 2004
Our guest author for this issue is Ed Holt, Managing Director of Aqera.
The past 12 months has seen much interest in the potential of wrap accounts for the UK market, and the launch of a number of 'first generation' wrap platforms.
Much of the early debate was about 'if' wraps will arrive - but increasingly it is about 'when'. There is no doubt, however, that when they do arrive they will have significant impact on the present value chain, representing a threat to traditional product providers, but opening up significant opportunities for both major distributors (bancassurers in particular) and large brands seeking to enter the market.
PORTFOLIO
Wrap accounts integrate front and back office processing on a single platform, with full transactional capability across a range of tax wrappers, direct investments, cash and underlying funds, so enabling Financial Advisers to manage an investment portfolio with a single charge, very high levels of service and advice, and giving the clients an aggregated view of all their assets.
A fully functional wrap account will enable advisers to establish their customers' risk profile, investment profile and asset allocation model and deliver very high customer service, with continuous, real-time access to information and advice. A range of tax wrapped products (such as SIPP, PP, ISA & PEP, Bonds) will be offered for a single transparent charge based on AUM. A true wrap platform will be open architecture, giving access to a range of investments, equities and funds. To deliver low cost and high levels of service, wrap has to be delivered on an internet based technology platform that delivers straight through processing and from a suite of advisory and transactional services (see Figure 2).
The awareness of wraps and their potential has changed markedly over the past 2 years. In 2002 80% of IFAs were unaware of wrap (Datamonitor) whereas today 95% of IFAs are aware of wrap, 92% believe wrap is relevant to their business and 90% believe wrap will grow considerably (CWC Research for Fundshub, October 2003)
The research also shows that IFAs want a wrap platform to offer investment into equities, bonds, unit trusts, OEICs, investment trusts, cash and property, and to provide tax wrappers for ISA, PEP, SIPP, EPP and offshore funds.
Aqera has been working with 3 major UK product providers to assess the threats and opportunities posed by wrap. The feasibility study has focused on different business models, functional requirements, technical infrastructure and delivery timetable. Market testing with a number of IFAs has been enlightening; one said, "If we had access to a platform like that we would test it for 3 months and then immediately transfer £500 million of assets. The key drivers for us are increased service levels across a range of wrappers and funds, and lower cost of processing".
Given that today's product providers have an existing business to run, the focus has to be on supporting their immediate challenges (e.g. aggregation & valuations, multi-tie, A-Day, administration cost base and compliance) and do so in a way that can build incrementally to a new platform (and potentially new collaborative business models) to support true wrap.
Four competitors in the mutual fund industry came together to create Cofunds, disintermediating themselves from the old value chain, but potentially taking a bigger piece of the new - these are the choices that today's life and pensions providers are facing with wrap.
All the evidence is pointing to an emerging market for UK wrap, with an appetite especially amongst advice-based IFAs for the platform described above. New technology to support low-cost 'straight through' processing can be delivered, and done so very cost effectively - more so in a shared model - and with low risk incremental delivery.
Wrap will new create commercial relationships in the market, but (more significantly) has the potential to transform today's value chain for retail financial services.