News - Press Release

April 2009

Shallow or deep: Is this the key question when selecting a wrap platform to work with?

By Chris Read, chairman, Dunstan Thomas

Dunstan Thomas’ own investigations of the wrap world have produced a number of conclusions not least of which is the fact that they cannot be ignored by either providers or advisers who wish to thrive in the pensions and investments world in the twenty first century. Research commissioned by Dunstan Thomas in April 2008 concluded that nearly a third of whole market IFAs (30%) were actively moving customers onto wrap(s) and more than a third (37%) were ‘planning to migrate’ some or all their customers by year end.

Coredata Research, an authority on wraps which carries out its own research on the wrap market annually, believes that most advisers will have executed migration to wraps by 2012. Assuming then that the market is actively selecting a wrap or a number of wrap platforms, or even building them in the case of some providers, should they be selecting (or building) shallow or deep wrap propositions?

Different wrap business models can be categorised in a number of ways. One of the first basic distinctions is between ‘bundled’ and ‘unbundled’ pricing models. In the ‘bundled’ pricing model (mainly life companies with multi-fund choices and fund supermarkets), the client is presented with a single price or charging structure which all the parties (provider, fund manager and distributor) share.

By contrast, the ‘unbundled’ pricing model is much more transparent and shows the client the variable (and sometimes negotiable) individual costs for each of these elements. This approach has been adopted with enthusiasm by advisers seeking to break the ‘umbilical cord’ commission relationship with providers and is specifically backed by the Financial Services Authority (FSA) which promises scrapping of commission-based sales by 2012 as one of the stated aims of the Retail Distribution Review (RDR).

Equally important is defining the difference between shallow and deep wraps. Also described as the ‘Aggregated Data Model’, shallow wraps are essentially web-based extranets or portals linked to external product systems belonging to various pensions and investment product providers. The primary purpose is to provide consolidated valuations on demand. The wrap does not hold underlying assets and consequently has difficulty offering the depth of functionality that is increasingly expected from a wrap. For example, they may have very limited Straight Through Processing (STP) capability and rely quite heavily on manual processes behind the scenes to complete transactions. Data is also duplicated several times across a variety of product administration engines and changes have to be duplicated several times (e.g. change of address).

This approach appeals to advisers seeking to reduce paper flow and increase electronic information flow but still deal with a variety of well-known provider brands in each of the product categories. Shallow wraps are essentially thin client, web-based offerings which rarely offer full desktop functionality to make new applications (without repeating previous information and Money Laundering procedures) and implement comprehensive portfolio reviews or even ‘simple’ rebalancing exercises. Some shallow wrap operators mistake breadth of choice of providers for the depth of functionality that we think most advisers are looking for as they plan the migration of customers onto wraps.

Deep or ‘Asset Aggregated’ wraps offer a fully integrated product and investment dealing system which provides fund transacting, managing and administrating capability as well as custodianship. In our opinion this approach offers considerable economies of scale and efficiency (which in time will be recognised by lower prices) and a superior service proposition for both adviser and client.

The deep wrap approach appeals to those advisers who offer ‘lifestyle holistic financial planning’ as their core added value proposition to the client rather than simply a choice of product provider. We expect that over time these distinctions will become blurred as shallow wrap providers promote ‘preferred partners’ with pricing and service incentives and deep wrap providers seek to expand their offering to niche or ‘non core’ tax wrappers through partnerships with external suppliers, inevitably with some service or facilities reduction.

Some of these wraps will challenge front office application providers by offering portfolio planning tools, whilst others will co-operate with these players by providing tight integration with them. This is not always popular with advisers who may find that their preferred planning and analysis tools are not included by particular wrap operators.

Greater transparency around charging is another important by-product of deep wrap as most of the deep wrap operators have also chosen the ‘unbundled pricing’ route.

Why then are deep wraps finding favour with the New Model Adviser? Quite simply they provide the catalyst for many of the changes they know they need to make to survive. They cannot go on over-spending their time servicing clients dealing with the arcane and bureaucratic administration operations of large providers. They want to show the client that they do not select product short lists based on which providers offer the best commission deals in a given product category, even if this offers the opportunity to rebate some commission to the client.

They know that even the least savvy clients will come to realise that there is no free lunch and that he has ultimately to pay for a ‘103%’ unit allocation. Advisers also desperately need administration processes and systems around product advice and sales to be more streamlined and automated so they can get on with the real work most appreciated by clients: advising and supporting clients in their quests to determine and meet their financial objectives. An increasing number are making the transition from being commission-driven, transaction-focused ‘pickers’ of product providers and products, to becoming New Model Advisers. Most already know they need to make this transition to build value in their businesses, conform with new RDR-regulatory regime and ultimately to survive.

There are also economic practicalities at work. A typical adviser firm of four will often seek to acquire as many clients as possible in the continuous quest for the next sale but cannot hope to offer a superior ‘wealth management’ service with higher service standards including regular review meetings to many more than, say 800 clients, 200 each. This already implies several client meetings every working day of the year, a level of activity currently not manageable in most firms. With the help of a good wrap platform, the 200 client ceiling can be broken, creating the possibility of efficiently managing as much as £20 million per adviser and a recurring income flow which sustains the firm without dependency on continuing sales and commissions and builds a considerable capital value in the firm.

For many firms, this will mean deciding which clients to keep and which to let go. Higher adviser business values can be achieved because the wraps themselves will enable third parties to get transparency on how many Assets Under Direction (AUD) a firm holds on a specific platform and because, in the unbundled pricing model, adviser firms control the level of fee paid by the client rather than relying on commission payments.

Firms today are typically valued at a multiple of their recurring income which often works out to little more or even less than 1% of AUD. This contrasts with product providers and asset managers who typically have values at a much higher percentages of assets. It is therefore of little surprise that many advisers are seeking to make the New Model Adviser transition as quickly as possible as they get older and that wraps and other parties increasingly offer business mentor and legacy product migration services to facilitate the considerable process of change management which is involved.

With or without the RDR, the adviser space is changing fast and taking value away from traditional product providers and offering much needed improvements in service standards in the process. New players are increasingly leveraging their considerable systems development expenditure by offering more than one wrap model to appeal to as many adviser firms as possible. The pace of change is likely to increase as the impact of the equity bear market, and the dangers of the traditional ‘buy and hold’ investment model, sink in over the next 12 months. For all market participants -whether provider, investment manager or adviser (or supplier to any of these) -the previously safe option of ‘do nothing’ is fast becoming the most dangerous option as the market changes shape for good.