It’s a wrap

Harry Kerr looks at ways wraps are helping to change the financial advice market including the move to using model portfolios and DFMs

The platform market has come a long way since the first wraps were launched in the UK. There is no doubt that the development of wraps over the past 11 years has helped shape the financial advice landscape that we have today.

Wraps have brought a level of administrative efficiency and service that have helped turn the market from, in effect, a cottage industry to one where IFAs are fully supported in running highly effective, professional businesses. More so, wraps are enabling firms to create a business model that can be shown to conform to regulation and will be RDR ready for 2013.

Client value

On a practical level one of the problems RDR poses for adviser firms, and as such is part of the evolution of the market, is how to tangibly demonstrate client value in an IFA service and so justify an annual percentage-based advisory fee (the much talked about 1% charge) to the client or an ongoing trail commission for legacy business.

This is not just a regulatory issue - IFA firms seeking to move away from commission to a full fee charging model have to make that transformation acceptable to the client.

Wraps have helped IFA firms achieve this through a combination of business efficiencies and client service.

For example, by putting all of a client's assets on the wrap and operating an open architecture structure, the IFA firm not only creates administrative efficiencies, so saving time and costs, but it can access all the investments the client may need in the one place. This enables better tracking and management of a client's total holdings.

In addition, by using electronic interfaces the client's portfolio can be re-valued on a regular basis and since all the activity is traceable, it can be checked for compliance purposes.

From the client perspective, value is created because not only are they able to access up-to-date data and details on their portfolios and so gain a more comprehensive picture of their total net worth but the service is available over the web whenever they want it.

Additionally, and importantly, for both regulator and client, wraps are transparent, they enable unbundled charging so the client always knows what they are paying and to which service or product provider. 

This greater efficiency and transparency has certainly helped the financial advice market deliver a better service and to progress more rapidly towards the FSA's RDR objective and deadline.

Discretionary fund managers

A topical example of how wraps are engaging with the evolving market can be seen in the current trend for IFAs to outsource investment portfolios to discretionary fund managers (DFM).

The advantage for the IFA in outsourcing to a DFM, either to run a bespoke portfolio or using a range of risk-related model portfolios, is that the IFA puts the investment management in the hands of an expert, whose job is solely to run money. This frees up adviser time to focus on the financial planning aspect of the business and building client relationships.

However, in order for the DFM to carry out the buy and sell transactions, often the client's assets move out of the adviser firm's control and sit within the DFM's structure. The danger for IFAs with this arrangement is that clients begin to see their primary relationship being with the DFM and so transfer their business to the DFM's advisory arm.

What wrap brings to the picture is a platform the IFA can use to retain control of all the client's assets, while accessing the fund management skills of the DFM. The assets remain on the wrap and so with the IFA firm and the transactional capabilities of the wrap, alongside the ability to host discretionary and model portfolios, allow the DFM to manage the portfolio accordingly. This provides the IFA firm with greater security and confidence in using the outsourced service because they remain fully in control.

These are just a couple of examples of how, in a practical way and with the fundamental focus on the core principles of transparency, efficiency and customer care, wraps are helping the financial advice market to continue to evolve.

Harry Kerr is managing director of Avalon Investment Services