legacy assets « DT Imago Blog

The current economic downturn has presented real challenges to the retail financial services industry as much as any other industry. Confidence as well as fund performance has taken a real beating. We know that there is not a great deal of new money coming into the market and a good deal is flowing out into cash accounts. With falling portfolio valuations and nightmare economic scenarios being played out in the media daily it is hardly surprising that some IFAs are feeling a little gloomy right now.

Nevertheless, there are two opportunities currently conspiring with the stock market performance shock to create a massive opportunity for the IFA industry in 2009: untapped legacy assets and the emergence of now mature wrap platforms after eight years of trial and error since the first was launched. The first element is a massive book of untapped, not actively managed legacy assets. We know there are literally billions of pounds of customers’ money lying in ageing personal pension plans and other products which are not being actively managed for the client at this point and are stuck in failing ‘buy and hold’ equity strategies, including traditional ‘balanced managed funds’ run by many life assurers. Advisers with old filing cabinets full of these cases gradually growing mildew in their basements will need a particularly good action plan when the annual reports and valuations start to land on the doormats of these clients this year…….but one is available.

The total UK retail investment market, life company funds, mutual funds and quoted investments (excluding what’s left of the defined benefit/final salary pensions market) is still valued at several trillion pounds. Much of this is still sitting in underperforming, largely unmanaged portfolios which are having their worst run in nearly 20 years. Clients will be looking for new answers to make their money work harder, IFAs who can offer this will be the winners.

The second element is the emergence of maturing wrap platforms. Wrap has moved from theory to reality through a sometimes painful learning curve experienced by the pioneers and pioneer users who have sorted out the ‘how to’ from the ‘how not to’. The mature wraps now offer a genuine opportunity for IFAs to define and deliver much more impressive and sophisticated combined service and investment proposition to their clients. These propositions can include meeting clients more regularly; defining their risk profiles; actively and regularly rebalancing portfolios; offering dynamic, even daily, valuations, and offering a wider range of asset classes and investment opportunities..
The mature platforms now offer much more transparency around pricing than was previously offered. The ‘unbundling’ of pricing which some of the more mature platforms offer is firmly in line with FSA proposals for independent Adviser Charging and offers IFAs a clear break with commissions dependency. For the first time fees can be linked to the amount and complexity of advice being given and are transparently assigned to parties involved. For example one major platform charges 0.25% of total assets under direction (AUD) as an annual management charge. The IFA advising on these assets may charge 0.5% of AUD by agreement with the client. With this sort of level of charging it is possible for the platform to pass on rebates, given by the fund manager involved, to the client. Fund managers typically charge 1.5% Annual Management Charge for a direct investor, but through a wrap platform this can be cut to 0.75% by rebating the difference. Although some platforms are still pocketing the difference, the more enlightened ones are passing these on and charge separately for their services.
If you are thinking that typical wrap costs are still significantly more than your average customer who has less than £100,000 in liquid assets is comfortable to pay; you may be right for a percentage of your customer-base. But for those above a certain threshold (which could now be as low as £60,000 in reality) it is surely worth identifying potential wrap platform providers; reviewing the services they offer; and then sharing the results of that exploration with some of your more active customers, even if their asset base is below this notional threshold.
Some clients may have less than £100,000 with you now but they often have more assets currently only vaguely recorded on your last fact find but not within the scope of your advice today. They may have funds in poorly performing deposit accounts or shares (inheritance, or denationalisation or demutalisation issues from the 80’s and 90’s). They may even have bought into funds directly (perhaps having succumbed to a third party ISA mailing or offer), paying unnecessarily high charges for this direct access. Some IFAs have experienced an average ‘wrap uplift’ of as much as a third when they transfer existing clients through the addition of these other assets, now all earning a fee for the adviser.
In researching emerging attitudes towards wraps, we interviewed a number of IFAs that are already actively migrating customers onto a range wraps. Our discussions revealed the take-up from clients they had offered it to has been nearly universal. Most expect to complete their discussions about the opportunities offered by migrating portfolios onto wraps with their entire client-base within two years of starting the process. The minimum percentage of customers that our straw poll of IFAs expected to migrate was 50 per cent.
So for the wrap converts what are the key advantages? The ability to offer higher quality service, without necessarily increasing charges to clients, comes through loud and clear.
James Roberts at Partners Wealth goes further: “Wrap platform migration has enabled us to lay down and communicate our service proposition to clients very clearly. We now guarantee an annual review meeting for all wrap clients. We also offer six monthly reviews, combined with clearly defining all clients’ risk profiles and offering continuous, even daily, valuations via our website which is powered by one of the platforms.”
Others say that transparency around the ‘unbundling’ of charges is a key benefit which is transforming their relationships with clients.
Andy Jervis of Chesterton House explains: “Wraps have enabled us to pre-agree Client Remuneration based on a simple and understandable charging structure and to only charge for service and expertise rather than to execute a transaction. We get a formal audit trail of charges from our wrap provider which tells the client exactly what percentage of AUM they are paying us, the wrap and the fund manager, annually and per transaction. This kind of transparency also enables us to be both more flexible and more consistent with our charging.”
It is becoming clear that some early adopter companies are transforming their businesses and re-energising the relationships they have with their clients through migrating them onto wrap platforms.
Other key benefits, according to the IFAs we spoke to, include an ability to offer a broader range of investments to clients on a wrap platform. They said they had been able to broaden their portfolio advice to include ETFs, investment trusts, FSA-approved offshore funds, even commodities and ground rent funds. Others said that wraps offer a consolidated position which makes it much easier to assess income levels for those already in retirement that need to create a stable income from their savings and investments.
What is clear from our investigations is that the benefits of wrap migration for IFAs genuinely committed to remaining independent (and not going down the guided advice route) are multitudinous and heavily outweigh any initial costs and time involved in transferring assets. The vast legacy asset pool must give all IFAs, even those which have not yet embraced wraps, an opportunity to investigate a number of the mature wrap offerings that are now competing with each other for IFAs’ business. Frankly if they don’t, they may well be staring at a problem that could affect the growth of their firm not only this year but for many years to come.