How can you select the right wrap?

Paul Burgin explains how to scrutinise the platform market.

There are now over 20 wrap and platform propositions on the market. New FSA guidance should clear up murky areas, but advisers still need to know what they want.

The difficulties involved in selecting a wrap have long been recognised. The FSA has been mulling the issue since 2007 and issued guidance to advisers in 2008. In the run up to RDR, more guidance was released at the end of March.

The regulator has already expressed its concern about the additional costs and complexity involved in using wraps. It believes many services come with functions that end investors must pay for even if they never use them. Advisers may also face conflicts of interest, where cost savings may drive advisers towards particular platforms that may not be in the clients’ best interests.

Its factsheet also raises questions about the impact of changing to new systems, training and competence. The FSA says firms may also have to revise their risk procedures as they move from one-off transactional models to the ongoing advice that wrap providers facilitate.

The question as to whether advisers should select just one or more wrap services is also a key concern. The regulator’s factsheet is ambiguous, although it does point out that using more than one will likely impact on support and administrative services within each adviser firm. Until the regulator gives more clarity, few IFAs are willing to put all their eggs in one basket and commit to a single wrap platform provider.

It sounds obvious but choosing a wrap or fund platform is not like selecting a product provider, insists industry veteran Graham Hooper. He should know – he has conducted two wide ranging reviews of adviser and client needs, and wrap and platform options, for national IFA firms, first with AWD Chase de Vere and more recently at Bestinvest.

Hooper says: “You need to think about what your business needs, not just what is on offer. Companies do not make it easy to compare and you have to delve deep inside. A lot have shiny front-ends but often the technology is not something you would want to risk your business and reputation on.”

Advisers also need to keep an eye to the future and increasing client expectations. Off-the-shelf services may suit for now, thinks Hooper, but they need to be future-proof, even to the extent of offering direct client access and aggregation services for their non-advisory financial products.

Freddie Findlater of The Platforum consultancy suggests advisers stop to think about their own businesses before they organise a beauty parade of potential wrap suitors. He says: “The most helpful thing IFAs can do is spend time on introspection. You need to take a good look at your business and what you want it to be. You need to look at the clients you have, how many you have and what services you want to offer.”

Business models

Advisers need to take basic decisions about their business models. Deciding whether to use model portfolios or discretionary management services soon cuts the list of potential wrap providers down to size. A review of pricing structures will also eliminate contenders, says Findlater.

To assist advisers in their initial selection of candidates The Platforum has developed an analysis tool, available free of charge from its website. Findlater says: “The PAT analysis tool saves a paraplanner spending weeks on gathering the basic information about platform size and product availability.”

The firm is working with Capita to develop the tool to include price and functionality comparisons. The new version is scheduled for launch in May.

There are also other basic selection aids. Comparison tools are still relatively crude as programmers grapple with the range and complexity of charging structures, product combinations and client portfolios that can influence pricing calculations.

Skandia’s Platformwatch compares platform charges for investment portfolios defined by the adviser. It covers seven wrap offers including its own Skandia Investment Solutions. Peter Mann, chief development officer at Skandia, says the website offers advisers other selection help. He says: “Perhaps the most common piece of feedback we have had from financial advisers is that one of the hardest challenges for them is knowing what questions to ask platform providers. What are the killer questions that can really help them differentiate the platforms and identify the right one for their clients.”

Skandia has re-interpreted the FSA’s current platform factsheet as a due diligence guide for advisers. It sets out a host of questions the firm thinks crucial to evaluation. The online document covers suitability, terms and conditions, range of asset class and support. It also outlines questions advisers should ask of the platform providers themselves, including reputational issues, financial stability and whether technology is proprietary.

Skandia says it will add online functionality to its analysis tools in the near future. Trade association AIFA is also developing a platform guide for advisers. But with the adviser and platform markets developing fast, few advisers are willing to bet their reputations on questionnaires alone.

The selection process

Some advisers have already had bad experiences with wrap providers. The decision by Amex to pull out of the market several years ago left many unable to access client accounts. Others have suffered teething problems and admin backlogs when going live. These days, advisers insist on seeing the whites of the eyes of potential partners before making firm decisions.
Although face to face questioning can extend the decision making period and even make it more complex, most advisers say it is an essential part of the selection process. But for some, the nature of their businesses renders the decision relatively simple. For No Monkey Business, cost was the key factor when evaluating the market.

Joseph Clark, senior client adviser, admits the firm is no ordinary wealth manager. He and his fellow partners see their role as one of protecting clients’ interests through cost effective access to their investments. They use passive equity vehicles and index linked gilts through a quantitative model approach, both vehicles are sensitive to additional costs and charges.

Clark says: “If we wanted to put all our clients and their money on a wrap it would be very expensive. It equates to a minimum but up to 60 basis points just for an administration system and a tax wrapper.” He thinks a DIY approach is better value for money. No Monkey Business uses Sipps from SippCentre and trading accounts from Selftrade to lower the cost to clients.

Clark has had experience of using wraps in a previous role and knows Transact, Standard Life and James Hay reasonably well. When probing the companies about how they could help the business, he was not impressed by the responses he received. He says: “Our question to Standard Life was how much would the tax wrapper cost. They could not and would not tell us outright, they would only quote on individual client cases. That sort of response does not inspire confidence.”

Simon Webster of Facts & Figures disagrees on the cost front. Having moved out of the employee benefits market into wealth management, he decided he needed all the help that was on offer, making service a more important consideration.

His first step was to rewrite the business model to make it TCF compliant. He then sifted his database of 2,500 clients, separating 700 of the most active and lucrative clients into three segments and the rest into a ‘transactional’ category.

Webster says: “The regulator has made everybody talk about cost as an issue. But that isn’t the real issue, it is value. I need a decent service that saves me time and lets me get on with my job of seeing clients.”

He has not opted for a single supplier, but has dropped FundsNetwork through a lack of communication from the fund platform. Webster has been more impressed with Skandia and says its advisers have been more proactive in helping him develop his business. He says: “It has been the best service I’ve had in 30 years. But I worry that they are so busy trimming costs, that level of support may not be there in the future.”

His perfect platform does not yet exist. He likes the Standard Life front-end and the ability to rebrand Transact as Facts & Figures’ own service. If either wrap was married to Skandia’s back end administration, Webster says he would have the ideal system. In the meantime, he is keeping his options open.

The long term

Chris Wicks of Bridgewater Financial Services is concerned about the long term viability of wrap solutions. His worst case scenario would be to move clients onto a platform and then have to fight to move them off if the plug gets pulled on the wrap business.

He says: “It is a question of having to move assets, not about the safety of the assets themselves. There are too many providers in the market and there is a price war going on, even amongst the companies not making any profit.”

The situation is not sustainable and Wicks says some providers will have to fold or face being taken over. He says it is sensible to consider wrap profitability before making a final decision. In his case, Transact was virtually unique in being in the black when Wicks made up his mind.

Whilst legacy business is being shifted to Transact, Wicks is also trying out alternatives. He is part of the Paradigm network and has access to Nucleus, which recently announced it is close to breaking even. He says its proposition is interesting and may be useful in future, particularly for clients with smaller portfolios.

In the meantime, he is checking out wraps whose owners have deep pockets. He says Standard Life’s commitment should ensure that its wrap stays the course, but that there are still service issues to be sorted.

Wicks says: “They have a problem in that they are picky about who can use the platform. I have used it before but they still have taken three to four months to allow me access. As we are coming to the end of the tax-year, I am having to tell clients to move to other wraps as I cannot access the system.”

He too is concerned about how much commitment wraps want in return for adviser business. He is wary of promising future volumes of business that he may not be able to deliver.”

Neil Mumford of Milestone Wealth Management has spent two years living and travelling abroad. The pension specialist is building a new adviser business back in the UK and has no qualms about trying out a newcomer to the wrap market. He has opted for Elevate, the wrap developed by Axa that went live in 2008.

Mumford decided to switch from Transact and Skandia’s Selestia later the same year after a review of his company’s proposition. He believes both were too basic for his needs at the time and was attracted to Axa’s proposition because the firm had taken time out from the market to re-evaluate which assets and tools advisers would need.

When he signed up, Elevate was still in its infancy and was not a full wrap service. Mumford says the proposition has developed steadily since then but admits: “We took a chance on it. Axa France has said that Elevate is a main business priority and they will put in the cash for the next ten years.”

Since then, Mumford says Elevate has offered high class service. Its telephone advisers are able to sort out demanding technical questions and correct any operational issues in good time. The service and technical enhancements have been second to none.