How the RDR will affect platforms

As more and more advisers opt to use wraps, Samantha Downes looks at how the platform will transform business post RDR

Advisers who use a wrap platform can often be almost messianic about its power to transform they way they do business.

Ten years after they were first launched, around £85bn is now managed via platforms, an amount that is set to increase to £100bn this year.

In 2010 the wrap market, which – like many based on new technology – has evolved beyond recognition. Jeremy Newbegin, director of The Ethical Partnership has been using a wrap platform since 2000. “Like any web-based emerging technology there have been functionality issues with wraps but we’ve stuck with it, and with the same provider, and it’s now an absolutely essential tool for our business,” he says.

Richard Goodall, sales and marketing director at Royal-London owned wrap platform Ascentric, says offerings have mushroomed since the first wrap launched in 1999. “There is a much wider investment offering now including stocks and shares and ETFs. So many new funds and fund managers have come in, whereas when they first started out, wraps were pretty much based on just insurance company managed funds.”

Users and providers of wraps believe the RDR will push more businesses onto the platform.

Fraser Donaldson, principal consultant for investments at Defaqto says the number of IFAs adopting the platform has risen dramatically in the last year. “Many advisers anticipating the FSA’s review have decided to adopt the platform early so that their businesses are geared towards RDR.”

The RDR is expected to require that advisers, who have not already done so, make their business practices conform to its stated requirements of simplifying financial advice and products. Higher entry-level qualifications and the banning of commission are regarded as almost inevitable in a post-RDR world.

Nick Cann, chief executive of the IFP, says advisers will need to up their game post RDR. “If an adviser wants to build their business and provide the best service possible then a move to a wrap platform is inevitable.”

Cann claims the time-saving ability of wraps along with their RDR-friendly – transparent – pricing structure are an essential in a world where regulation and TCF have placed more demands on advisers’ time and resources than ever before.

David Dodds, an adviser with Wade Financial Services says: “In the past it was four or five bits of paper for each company. If those same assets are in a wrap you can do all that online, plus you have access to 900 funds.”

Cann claims this use of a wrap helps advisers focus on what they do best: “Anything that removes the focus on product and allows advisers to give advice will help their business. A wrap cuts down costs and allows relationships to get more confident.”

For some advisers the time a wrap platform frees up is absolutely essential to their business model.

Jeremy Newbegin, says a wrap allows him to contract-out investment and administration specialisms to, “someone who knows it far better than me”.

He says: “I’m an ethical specialist so I can’t for my clients’ sake afford to limit my choice or waste time. I need to be able to access all possible ethical options. With not much choice out there, time is important.”

But so is Newbegin’s choice of wrap. “My business would be compromised if I didn’t have an open architecture wrap. Not all wraps include investment trusts for example, and I need to be able to invest in ETFs too.”

Innovation

Time-saving aside a wrap can also allow innovative IFAs to build their business beyond advice.
Andrew Bennett, principal of Minotaur Wealth Management has been using a wrap platform for six years. He admits Minotaur’s proposition is fairly unusual as his partner is a fully-qualified fund manager.

Combining his partner’s investment expertise has allowed Bennett to develop 10 client-centred portfolios using Skandia’s wrap platform, Skandia Investment Services. In the last two years all of the portfolios’ performances have exceeded their benchmarks.

Such is the success of the model that other IFAs now want to use Minotaur’s service. He says: “We have a number of IFAs who buy our investment process to use themselves.”

As well as offering business opportunities beyond their client base, wraps can also empower an adviser to take control over their client’s assets in a way that was not possible pre wrap.

Bennett claims advisers can be more proactive because of this. The real-time element of wraps means clients can be moved swiftly in and out of funds or assets.

“Again we choose our wrap because it offers bundled switching, not all will do this, which is why you need to choose your wrap carefully.”

This can also impact on charges. Wraps have already helped bring down the cost of collective investment via rebates from fund managers, which offer wrap platforms bulk-buying cost savings.

Goodall says: “Wraps have been really instrumental in informing advisers regarding the margin between what the insurance company pays and what the fund manager really charges. That’s why IFA owned wraps such as Nucleus now exist, empowering advisers who are starting to take charge.”

Advisers claim the real-time element of the wrap platform also allows them to build better more lasting and most confident relationships with their clients.

Simply being able to view their assets online is one way; Dodds, says the value a wrap can offer a technology savvy client is immeasurable. “A client can go online and view their wealth. It also means they can see how you are managing their money.

Another is being able to see exactly what your adviser is offering, for example how quickly an IFA can get a client out of a badly performing asset. Dodds says: “It gives the client confidence if you are able to do that and swiftly.”

Transparency

Another way of building client confidence is through a transparent charging structure.
Jonathan Hill, a certified financial planner at Milford & Dormor Solicitors says: “Transparent costing is one of the biggest plus points of the wrap platform for us and it’s the reason why we are getting more clients.”

Charging and commission will become big issues in the coming weeks as the RDR comes into force – and Hill claims he already has had important feedback which show how wraps will fit perfectly in an RDR-friendly world.

Being able to demonstrate the value of on-going advice is also easier via a wrap.

Mike Lane, wrap relationship manager at Royal London 360° says: “The wrap allows the adviser to provide ongoing advice and in turn receive ongoing fee income.

“It seems likely this may be seen as a better and more sustainable business model than the old reliance on initial commission.  The regular contact that ensues may help to build more client loyalty, leading to them enjoying long term mutually profitable relationships with their IFAs.”

Richard Goodall at Ascentric says clients do not know or care about RDR. “All they care about are the up-to-the-minute valuations they get. This means instead of a client meeting being based around how much they have, it’s about what they do with their money. That is what sustains client/adviser relationships.”

Left behind

Advisers who do not migrate to a wrap may be left out in the cold. Lane says that while RDR will not require advisers to use wraps those that do not will most certainly miss out.

He says: “Nothing that has been proposed would require advisers to use wraps but it is interesting to note that wraps were already gaining market share before the RDR proposals were made public, and market forces are usually a better way to achieve political objectives than legislation.”

Bennett says wrap use will become the norm because the pricing structure is RDR friendly and the wrap model has developed around advice, not product. “If an adviser hasn’t moved his business to a sustainable income model that is not based on trail commission then he is going to be vulnerable. The only way to do that is adopt a wrap.”

Wraps may also force some advisers to sell, the irony being that businesses which have adopted the wrap may be offered an easier exit strategy.

Bennett says: “With RDR there will be a qualification requirement and there are going to be a lot of advisers out there nearing retirement who don’t want to re-train and will look to sell their business. These are the same advisers who may not even be using computers, so they won’t be using a wrap.

Bennett says IFA consolidators such as Succession could find themselves in demand.

“It’s largely regarded that wrap can make a business easier to sell, “says Lane.  “A wrap can help an adviser demonstrate to a potential purchaser of their business that they have good embedded value, via being able to show, online and in real time a loyal long term client bank.”

The majority of advisers who continue doing business are expected to see their businesses develop through the improved technology wraps can offer.

Because it has encouraged more IFAs to use wraps, RDR could spell more investment wrap technology. Goodall predicts as more advisers start using wraps the technology could become more mainstream and use of the wrap platform could be rolled out beyond its original high net worth client base.

Goodall says: “Hopefully this will bring wraps to what we call the mass market level.”

Of course technological developments could also improve the way advisers do business. Goodall says providers are constantly looking towards Microsoft and Apple and technology they are developing. “It could be that smart phones are used in the future by clients who can via an application look at their assets online.”

Bennet says improved technology will go hand-in-hand with greater technological literacy among advisers. He says: ”You will see more white labelling of adviser developed wrap platform services, that will be where the advisers start to owning the asset.

“At the end of the day a wrap is just a piece of software and someone innovative enough to take ownership via innovation will be able to own it. This is what Transact realised when they reduced their charging.”

On a day to day level, advisers predict that more wraps will offer bulk switching.

Dodds also predicts the development of new technology like signature blocks – where a client can submit their signature online in much the same way as the Post Office now uses when delivering parcels-  and better risk profiling.

But technology aside, there are still some issues. Will the FSA require advisers to run more than one wrap in order to call themselves whole of market, and then of course there is the issue of fund supermarkets, which have a less transparent and therefore less RDR friendly pricing structure. Will they be forced to become wraps?

Cann points out wraps cannot handle legacy assets. “Unlike the Australian wrap model, which didn’t have to deal with legacy assets the UK market does.”

Whatever the wrap platform’s failings may be, they are not likely to prevent its increasing use among IFAs.

As Donaldson says: “We have always believed that the wrap platform was here to stay, it just needed a catalyst and RDR is proving to be just that.”