Wrapping up investments in one place

A number of new trends have swept the UK investment market in the recent past, but the most significant ones are within the retail distribution arena. Fund platforms, which have fast proliferated in the last five years, have been attracting an increasing share of the country’s mutual fund market, as both investors and advisors warm to the idea of having all their investments accessible in one place.

Cofunds, the UK’s largest independent fund platform launched in 2001, has now reached £10bn (?16bn) in assets under intermediation. But according to the company’s chief executive, Charlie Eppinger, this is only the beginning, as assets on UK platforms are forecast to reach £180bn by 2010. More importantly, of the projected £80bn annual new business in the total fund market in 2010, around £50bn will go to aggregated platforms. Annual inflows on platforms would increase to 60 per cent of the total annual inflows in the whole UK fund market, from 20 per cent today, according to Cofunds.

Other platforms are also enjoying rapid growth. FundsNetwork, Fidelity's fund platform, also with over £10bn in assets under custody, since its launch in June 2000 more than quadrupled the number of funds available from the original 250, now offering over 1000 funds from 55 fund management companies.

But the concept of a simple fund platform has recently evolved to that of wrap or tax-wrap. A good number of major UK fund platforms, including Skandia, Transact and Abbey, as well as Cofunds and FundsNetwork claim to offer some form of wrap service. Although the level of services and tools that wrap platforms should provide has not yet been defined in the UK, in theory wraps should be able to transact every form of investment instrument, as well as providing efficient tax wrappers.

One of the latest financial heavyweights to join the fray has been Standard Life, a clear sign that insurance companies have now moved to this space. Standard Life, however is in a particularly strong position because they are “blessed with a wonderful investment company [Standard Life Investments],” as Trevor Matthews, the company’s chief executive of life and pensions business puts it.

Insurance companies in the UK have traditionally sold the concept of a wrapper, a pension wrapper, a life wrapper or unit-linked wrapper. But while for centuries they sold their in-house manufactured products, in the last decade – and particularly in the last few years – life companies have started providing third-party funds too.

The concept of open architecture, pioneered in the UK by Skandia in 1994 has now really taken off in the sector, says Mr Matthews. “The insurance industry has moved along that path of open architecture quite dramatically over the last couple of years and it is now accepted as the only way to go.”

But Mr Matthews does not hide that selling in-house products is still preferable. “While we offer open architecture [through arrangements with consultant Wilshire], we hope that end customers will choose to put a significant percentage of their money into Standard Life investment funds,” he says.

Standard Life’s new wrap programme, which supposedly includes all of the investment services that an intermediary should expect from a wrap platform, is designed to target banks as well as independent financial advisers (IFAs).

“We have had a policy of building on the traditional strength that we have got in the IFA sector, but also we have concentrated the last couple of years trying to diversify our distribution,” says Mr Matthews. Without disclosing any figure, Mr Matthews says that they “have made good inroads” into banks recently.

Products such as onshore and offshore bonds, insurance bonds, self invested personal pensions, and direct shares as well, are all included in this wrap proposition, in addition to mutual funds. This wider spread of investments requires the necessary infrastructure, sophistication and service capability that banks often do not have, says Mr Matthews. Banks are offered the opportunity to configure the platform that suits themselves, he says, and decide whether or not they want to put a complete open architecture approach in place.

The tax wrapper is therefore more complex than just offering the open architecture investment choice. The idea is to look at investor’s goals, attitude to risk, work out the recommended asset allocation and then populate it in the most tax effective way with any of the products.

It seems that wraps are in some way enabling private banks to re-package products traditionally sold to private clients for the mass affluent segment. In other words, wrap technology would be encouraging private banks to target less wealthy clients.

“The wrap infrastructure enables a service previously reserved for high net worths to be efficiently provided to the mass affluent market segment, as the proposition can provide comparable levels of investment choice and reporting,” explains David Bower, director at UK management consultants CSTIM. “This provides opportunities for traditional wealth managers to lower their target audience to the mass affluent for traditional IFAs to target a more affluent client base.”

But John Pottage, chief executive officer at UBS Wealth Management UK denies that wraps are relevant to a private bank like UBS, because the breadth of their product offering is “so much wider than any wrap programme would offer.”

A wrap programme is purely a platform offering administration and management services for intermediaries and their clients and supposedly does not compete with intermediaries. “But through the size and critical mass that we have, we are best positioned to provide advice regarding third-party funds. We have the resources to do more due diligence and go into more detail about the composition of underlying funds, so we can assemble them together in a way that is most appropriate,” says Mr Pottage, who discounts wraps just for the very retail end of the market.

There is no doubt that one of the main drivers behind the development of the trend for wraps in the UK can be found in the country’s peculiar retail distribution market. IFAs are responsible for 70 per cent of all the sales of financial products in the UK, unlike in other European countries, where banks are the dominant distribution channel.

IFAs, who are mainly small companies, do not have the systems to create their own platforms. With clients becoming more demanding and the number of financial products available on the market continuing to grow, platforms or wraps can represent a more practical way for IFAs to handle their customers’ requests. About four or five years ago, they started selling “accounts” on the different platforms rather than individual funds.

“It is difficult for IFAs, who are small businesses to do the infrastructure and back-office work, platforms or wraps,” says Michael Jones, head of financial institutions at Fidelity International. While banks are bound to be able to hold clients records, for an IFA there will be still bits of paper to tuck in a filing cabinet.” Although Mr Jones predicts a clear growth of these instruments, wraps are still “right at their very early days of emergence.”

The other trend which in the UK is still at its infancy is open architecture, in its meaning of selling financial products over the counter of a branch to an end customer, says Mr Jones. “In that regard the UK is still a long way behind Europe in adopting open architecture,” says Mr Jones. HSBC is the only retail bank to have adopted an open architecture approach, through its multi-tied advisory service, selling Fidelity’s funds alongside those from other four other manager, plus the bank’s own funds, reckons Mr Jones.

The new concept of a multi-tied financial adviser, introduced by new regulation on depolarisation over two years ago, has not taken off yet as quickly as expected by the industry. Advisers can now decide to be tied to a limited number of companies, in addition to being completely independent, meaning that they will have to scan the whole market to pick the best products, or tied agents, selling only one company’s products. “The reality is that a lot of IFAs were in that sort of [multi-tied] space anyway,” explains Mr Jones, as selling products from a limited number of large providers enables them to reach better payment terms and better service.

So IFAs have preferred to continue to call themselves independent and have not really adopted the multi-tied or best of breed model, even if they are still using a limited number of providers anyway.

The other major trend in the UK retail distribution market regards the remuneration model of the financial adviser. IFAs are slowly but steadily trying to shift their current business model, where living is made mostly from earning the initial commission, to a model where on-going commission or trailer commission assumes a more central role, with a consequent reduction of the initial commission.

“It is their interest to maintain their service to the client, because that is the way they are keeping on being paid for their income of the future,” says Mr Jones. “That aligns their interest more closely with the clients, so they don’t just put their clients into a product and never talk to them again.”

This remuneration model, which is still an aspiration for many IFAs, values the long term relationship with the client, rather than the quick and hard sale of products. In this aspect, it follows the footsteps of the remuneration models employed by banks such as Barclays, in accordance to the Treating Customers Fairly principle put forward by the UK Financial Services Authority (FSA).

Stephen Ingledew, commercial director at Barclays Financial Planning, explains that the advisers that Barclays employees are paid a basic salary and a performance related bonus. “The bonus criteria ensure there is no product, fund or provider bias, by rewarding advisers with the same credit, irrespective to what is recommended.” This ensures that the advisers act in the customers’ best interest and are not incentivised to promote one product or provider over another, he says.

Last year, Barclays heavily recruited independent financial advisers to work in branches, “because that is where customers want to meet.” Of the 900 financial advisers, two thirds of them are based in branches and the remaining 300, the mobile ones, go and visit customers.

Despite the growth of internet banking, face to face contact is still crucial. “A proportion of customers, 25 per cent, are very happy to look after their finance themselves on the internet, particularly the 45+ age group, but the other 75 per cent prefer face to face advice whether in the branch or at home.” This is because clients do not have time and because financial matters now have become too complex to be administered single-handed, says Mr Ingledew.

Barclays will continue its recruitment programme from the IFA community during 2007, and a plan is already in place to hire 200 more advisers, bringing the total number to 1100.

Depolarisation has certainly affected distribution strategy at Barclays bank, explains Mr Ingledew. Before new regulation came into force, the bank used to sell only Legal & General sourced products. Now the firm offers products from eight major providers, such as Morley, Norwich Union and Axa. The proposition, which has £1.5bn of assets, is called “select choice”, having selected “the best from the whole of the market to give our customers choice,” says Mr Ingledew.

But Barclays’ largest business in third-party managers is its £10bn multi-manager platform, which makes it the biggest in the UK, claims Mr Ingledew. The rationale for setting up the business was “providing customers with diversification and broader investment exposure, so to be able to put together risk profile funds.” The platform employs 30 managers, ranging from large companies to boutiques, including Fidelity, Schroders, Legg Mason, Goldman Sachs Asset Management and Artemis. Every year, the multi-manager business attracts £1.5bn in assets, which represents 50 per cent of the total assets invested for clients, the remaining 50 per cent going into other types of investments. Fund selection and asset allocation models are done at the head office, “so that financial planners can concentrate on customer relationships. Financial planners don’t have the time or the expertise to select the right ones, they are not investment specialists,” says Mr Ingledew.