How wraps are helping to evolve the advisory sector

Nucleus chief executive David Ferguson discusses how wraps are playing a crucial part in moving the financial services sector forward.

The past few weeks have seen monumental changes in our industry. Unless you have had your head buried in the sand, you will of course be aware that Fidelity FundsNetwork, one of the largest fund supermarket platforms, has decided to disclose fund manager rebates – essentially, how much it is paid by fund managers.

In more immediate news, Cofunds has revealed all (or at least most) in terms of its own unbundled pricing model which the £34bn platform expects to go live at some point next year. I cannot stress enough how significant a moment these actions are for the industry as some of the larger platforms sign up to the future.

It’s a start

A decade ago, Transact paved the way for forward-thinking IFAs and the wrap sector has been committed to transparent models ever since then. The rest of the industry has a long way to go to catch up but the announcements from Fidelity and Cofunds are a very good place to start.

The most interesting phase of this industry change will occur when fund managers realise platforms are no longer distributors and that it is advisers and their clients that determine the flow of assets. And it would be a fair assumption that this will result in a change in pricing behaviour.

In terms of pricing it is hard to make platform-to-platform comparisons as structures, functionality and service levels vary widely. In headline terms, Cofunds appears pretty competitive against the current wrap market but given functionality is so widely different and there is a lack of clarity (silence in fact) over the price of tax wrappers such as SIPPs there may be more 
to it.

One thing is for sure – the pricing proposed is not as game-changing as some industry participants were noted to utter. It also suggests that, even with considerable scale (of the nature that Cofunds enjoys), the delivery of a more open model supported by full transparency may not be quite as easy as some would have us believe.

Alongside this we would always urge IFAs to remember the fourth pillar of due diligence, which we see as cultural alignment with the customer. This is obviously impossible to judge or calibrate on an analytical basis.

The new world

What we can observe however is that many legacy providers, particularly life companies, will struggle in the new world as they have little awareness of what a customer even looks like – their pursuit of an intermediated, commission-led model for the past 30 years has seen to that.

The main thing this industry needs to do is to instil some trust into consumers – this is aimed at the entire financial services sector, not just platforms. From our point of view, much of that trust will be founded on transparency and consumer confidence that the scams, kickbacks and dirty margins of the past have been truly consigned to history.

It is still early days and there is a lot of damage to be undone but the wrap sector is well on its way in terms of moving the market on, in encouraging participants to be accountable for what they charge and ultimately in starting to build a more engaging sector.

Good news all round

Greater transparency is something the industry is crying out for as it will lead to price harmonisation and greater accountability for fund managers. This will ultimately lead to margins falling for those that are under-performing, but rising for the strongest of the bunch.

While this is good news for us providers, it is also very good news for consumers. Greater transparency will ensure only the very best providers are left in the marketplace – those that are not up to scratch will be forced to leave.

There is still a long way to go to make our industry truly transparent, but these announcements from Fidelity and Cofunds have moved us closer. It highlights how transparency needs to be a state of mind rather than a regulatory requirement. The onus is now on the rest of the big players to follow suit.