Wraps and prospects for foreign managers

Wraps or platforms are becoming increasingly popular in the UK market. Investors have become more aware of the benefits of diversification offered by these distribution and asset allocation systems, which employ different fund managers and select a variety of funds. These new investment mechanisms also satisfy investors’ needs to consolidate all their investments in one place. The future for the UK wrap sector was explored in a panel debate at the European Fund Series conference in London, where panellists gave their views on the challenges that the market faces, and comparing it to other international markets with similar experiences. Holly Mackay, UK director at Allfunds Bank, sees the UK market as relatively underdeveloped in the platform space compared to the Australian market she knows well. She said the main two challenges were its very complex product environment, characterised by a myriad of funds, as well as its fragmented distribution network. “There is an enormous potential for wraps, but not for the model we have seen emerge to date, which is one provider wrap trying to do it all, with a price tag in excess of £50m,” said Ms Mackay.

Mackay: believes in a process of sourcing a combination of partners

She sees that potential lies with independent groups of IFAs forming consortiums or with providers branding a wrap, but not building every single component themselves. “There are a lot of challenges to overcome but the model has to be sourcing a combination of partners to provide you with that wrap, rather than sit in-house and try to build it all yourself,” said Ms Mackay. There was common consensus among the panellists that wraps imply shifting from a product approach to a service, advisory approach. Philippe Couvrecelle, chief executive officer at Axeltis, the third-party distributor for Natexis Banque Populaire, believes that the big challenge, both for distributors and asset managers, is focusing on clients’ needs and risk profiles, rather than selling them the best products. He explained that in France his group is already implementing this migration and its branch network is moving from a “push product approach to a service approach”. He said training and education are what counts in distribution. “The service of asset allocation is really more important than to have the very best US equity products,” he said. This same concept is at the base of Fidelity FundsNetwork, explained Robert Fisher, director of the largest UK platform. He said: “We realised that the development of the agenda has to shift from asset providers to advisers. Distributors and advisers are the hub of the future for wraps.” Robert Fletcher, managing director at Lifetime, the investment platform backed by Norwich Union, said: “Much more focus on investment advice and less focus on product selection is what wraps are enabling.” Lifetime offers a broad range of wrap options. The challenge is to unlock financial values in the IFA businesses, he said, which could be achieved if IFAs move to a new model where their remuneration is not based on initial commission, but they are motivated to talk to their clients about their long-term requirements instead. Ms Mackay stressed that platforms or wraps are an economy of scale business. She believes that, in the UK, platforms need to have at least E8bn to E10bn under administration to break even, estimating that there is room for seven or eight large platforms, where the underlying providers of different services, such as technology or fund administration, can be the same. Consumers or distributors might not realise this, because the brand will be that of the bank, or the life and pension company owning the platforms, some of which will also be independent. Depolarisation and expectations on new developments have contributed to making the UK a more attractive territory for foreign fund managers, both for the asset management and distribution sides. The UK market, recognised as very competitive by speakers at the conference in regard to asset management, is also seen as mature and sophisticated at the distribution level. “Banks in the UK will blaze the trail and the rest of the world will follow,” said James Ellis, development director at SG Private Banking. He conceded that the huge opportunities are now in the Far East and the Middle East, and they will increase, but that will not be at the cost of the UK.

ET

Couvrecelle: from a push product to a service approach