2008 is ‘Year of the Wrap’, finds new Dunstan Thomas
survey of adviser community

71% of adviser firms’ wrap migration strategies may be in breach of ‘Treating Customers Fairly’ (TCF) principle, but could go hand in hand with firms’ pensions consolidation programmes

Wrap platforms are expected to have the most significant impact on the retirement planning market this year, according to a recent survey of advisers commissioned by pensions and investments technology solutions provider Dunstan Thomas. A total of 39 per cent of advisers saw wraps as being more important than ‘innovation in SIPP products’ (e.g. family SIPPs, corporate SIPP etc.) which picked up 23 per cent of the vote; and ‘enhancement of legacy pension schemes’ chosen by 21 per cent of respondents.

So if 2008 is the Year of the Wrap for advisers, how are they migrating customers to wrap platforms? Worryingly, Dunstan Thomas’ survey finds that the approach adviser firms are taking in selecting specific groups of customers for wrap migration may well fall foul of new Treating Customers Fairly (TCF) rules.

The largest sample and a majority (52 per cent) are actively revisiting ‘selected clients’ to assess whether to move them into a platform; while a quarter of adviser firms are only adding ‘new clients’ into a wrap. Somewhat disappointingly only 19 per cent are revisiting all clients to assess whether to move them, and just four per cent are actively moving all clients together onto a wrap platform right now.

Chris Read, chairman of Dunstan Thomas, assessed the implications of this finding:
“More than two thirds of adviser firms (71 per cent) may be in breach of TCF by selecting specific groups of customers for migration to wrap rather than explaining the pros and cons of wrap to all customers and helping them to make the right decision for them.

“We see a real opportunity for adviser firms to link wrap migration with current campaigns to streamline and consolidate client pensions policies because those that would benefit from consolidation are also likely to derive benefits from migration onto wrap platforms. This strategy would seem to offer an opportunity to survey their whole client bases and assess everyone’s suitability for migration onto a wrap platform (s), thereby avoiding any breach of the principles of TCF.”

Despite these restrictive migration strategies the benefits of wrap came through loud and clear from the adviser community. The vast majority of advisers saw wraps’ ‘ability to apply holistic asset allocation, selecting the widest possible range of investment types across a range of tax wrappers’ as the key advantage (with a rating of 2.82 out of 9 where 1 indicates that it is the key advantage). The next most significant advantage for respondents was ‘explicit and transparent charging’ (3.83 rating) whilst the third most significant advantage was ‘enabling much needed efficiencies and reducing administrative burden of dealing with providers direct.’

Not surprisingly given the importance placed on a good choice of funds and tax wrapper types, the existence of a good choice in these areas is the primary consideration when selecting wrap platforms (for 45 per cent of the sample). Following on from this, 17.5 per cent most wanted to see ‘clear evidence of strong administrative systems sitting behind the front-end enabling crucial integration with existing desktop-based systems’ that adviser firms already use. These two factors come in ahead of conducting their own ‘due diligence to ensure that the platform providers are viable financial entities with the right vision for growth’ (16 per cent).

The wrap concept is judged to have now come of age after several false starts, primarily because the emergence of SIPPs and other complex pensions into the mainstream has created the need for an advice and transaction platform which brings together lots of different types of assets into one place (28 per cent). Others simply think wrap platform providers have finally reached a stage of maturity where ‘they can do what advisers need them to do’ (26 per cent).

Despite wrap platforms’ moment seeming to have arrived for this adviser sample, only just over a third had already signed up a single wrap platform provider (17 per cent) or a number of wrap platform providers (18 per cent). But perhaps most interestingly, virtually the same number of firms in total (37 per cent) are planning to sign up several wrap platform providers this year. Such is the anticipated success of wraps, only eight per cent of this sample said that migration onto wrap platforms was not included in their 2008 business plans.

The key brake on wrap platform adoption is the anticipated ineffectiveness of integration between providers, investment managers, administrators and platforms (for 36 per cent); whilst the next largest sample (15 per cent) thought high Total Expense Ratios (TERs) would continue to hamper wrap adoption. Linked to those concerns, a further 13 per cent specifically stated that lack of electronic standards for the movement of data to enable key wrap offerings such as real-time multi-asset valuations, would emerge as the key impediment to progress.

Despite these concerns, over two thirds (69 per cent) said they would be using wrap platforms for investment management this year. 58 per cent said they would also use it for financial planning, while 60 per cent also expected to be transacting business via wrap platforms. Also positively, some 16 per cent said that they are receiving fees ‘slightly more often’ as a result of wrap usage and three per cent said they were receiving fees ‘much more often’ since switching to wrap usage. Importantly, some 59 per cent also expected to see charges associated with using a wrap to fall this year, presumably as more subscribers create economies of scale.

The same survey also explored wider views of financial advisers. For example, more than half of the pensions and investment financial advice community (54 per cent) now think that current market turmoil in the financial markets poses ‘the most significant danger to the stability of their businesses this year’.

A much smaller sample (15 per cent) saw that that attention being devoted to the Government’s planned Pensions Account would be the most disruptive factor in the pensions market this year; whilst the same number (15 per cent) thought the additional training requirements prompted by the Financial Services Authority Retail Distribution Review (RDR) would be the key threat to stability of their businesses in 2008.

Dunstan Thomas conducted the survey of 3,956 investment and retirement planning-linked financial advisers through Matrix-Data in February 2008. Of this sample 96 per cent were whole market IFAs, whilst 2.5 per cent were stock brokers and 1.5 per cent were multi-tied agents.

Chris Read added:
“Our survey finds that after several false dawns the Year of the Wrap is finally upon us with major interest in and take-up of wrap platforms and customer migration programmes now underway across many upper tier adviser firms, even if firms need to be careful not to fall foul of new TCF rules. We also believe that advisers walking people through plan consolidation to increase the effectiveness of their retirement provision, should also be looking very seriously at migrating them to wrap platforms simultaneously. It’s an ideal opportunity to offer clients greater transparency and flexibility around fund and tax wrappers and to move them from commission-based to fee-based advice.”

“There are also clear pointers here for platform providers in terms of what they need to focus on – integration with existing front office systems and between administrator, provider and investment firms’ back office systems is still a concern for advisers as they look to wraps to help them reduce their heavy administrative overheads, implying the need for more Straight Through Processing.”
-ends-

Notes to editors:
Dunstan Thomas commissioned Matrix-Data to conduct a survey of 3,959 financial adviser firms and other intermediary organisations doing pensions business. The questionnaire tailored to this audience was distributed via email on 11th February 2008 and responses were closed on 20th February 2008. A total of 94 completed responses were gathered in this time – a response rate of 2.4 per cent.

Dunstan Thomas commissioned Matrix-Data to conduct a parallel survey of 183 pension providers and administrators that were pre-screened for likely involvement in the SIPP market. The questionnaire, tailored to this audience, was dispatched on 11th February 2008 and closed for response on 20th February 2008. A total of 29 responses were gathered in this period – a response rate of 15.8 per cent. For the findings of this survey please make contact with Agility PR or go to www.dthomas.co.uk