Bluerock Review : June 2003

The content you are searching for is contained within our extensive library of PDF publications.

To access this document simply click the title of the publication shown below and you will be forwarded to our download page.

Bluerock Review - June 2003 (272k)
WRAP, a new idea to hit the UK. " 'Green Shoots' of recovery in the city (preview).
Keywords: wrap, tax, investment management, managed accounts, fund supermarket, recovery, Basel 2


  PDF documents can only be viewed with the Adobe Acrobat Reader® application. This is available to download free of charge from the Adobe web site. If you do not currently have Acrobat Reader® installed, simply click the button to the right to download it.

If you experience any problems downloading any of our publications, or require alternative formats or additional information, please contact us.
Wrap, A new idea to hit the UK: What is it? Over the past year or so, the word wrap has started to evoke much discussion within the UK Financial sector but there still remains much confusion of what it really means. It is not uncommon for investors in the UK to spread cash deposits and investments across a range of different savings vehicles and providers. Furthermore, most of us, quite often via totally different providers have protection policies, mortgages, loans all of which need to be considered before we can establish accurately "how much am I worth?" and "what am I likely to be worth in the future?" "Can I please view everything in one place, with a single view and single total without having to rummage through a range of confusing statements from dozens of different financial houses and fund managers". What a great idea? Indeed, it would be even better if I can move money around within the investment types and funds and not have to pay charges every time and be able to channel my requirements through a single source. Is this possible; it's a wrap as they say in the film making industry and now in the financial sector. It's a wrap Wrap accounts are a concept that has come over from Australia and the US. Their version of wrap accounts allow investors to package up all separate investments and product types together. The other benefit, is that the investor pays only one fee to the wrap account manager (typically 2% - 2.5% in the US and Australia) and what's more, it enables the wrap account manager to have a more "holistic" view of investments. The wrap account manager can look at the investors overall needs, working on our behalf to become more tax efficient and reassess investment goals as circumstances change; buying, selling and switching products at the best time for an investor without having to incur fees for each movement. Is this just what we investors are asking for? As well as the prospects for the investor, it is now seen by a number of advisers, life groups and investment managers as the ultimate in industry vehicles to deliver comprehensive financial management for investors. But, have we heard this before, is this just another name for Wealth Management or Fund Supermarket so time for clarity. Before we do, lets have a brief look at how wrap has evolved elsewhere: In the US, the wrap was launched in the 1970's and since 1996 growth has been at the rate of 30% - 40% a year and now stands at over $750 billion. Tax implications have been the major driver for their adoption and growth. In Australia, wrap has been driven by "service", providing aggregation solutions for the investors portfolio with consolidated views and reports. Wrap service accounts for some 70% of the Australian retail market. For the UK, the parallel can be drawn more closely to the Australian model. US and Australia represent mature markets for the wrap service that have seen significant success. More recently, South Africa introduced the wrap service concept in 1998 and has also experienced significant growth in their popularity; seen there as a good way of widening investment allocation and reducing exposure to market volatility. Wrap accounts for nearly $2 trillion globally. What is the scope for the wrap in the UK and why not before? The UK financial sector is once again experiencing significant changes brought about, for amongst other reasons by the introduction of depolarisation through the Sandler Report, CP121 and CP166. This has helped to create an advisory and distribution framework within the UK industry more able to embrace the wrap concept. One of the key fundamentals being the shift from commission based sales to fee based advice. The wrap could be the lifeline for the IFA who feels threatened by depolarisation both in terms of their revenue and their role with their customers. At face value, wrap appears to be a great concept and it is a success in other countries. The potential benefits to advisors and investors are obvious to see however, there are fundamental issues that remain: - In a recent survey undertaken earlier this year by Datamonitor, only 21% of IFA's surveyed know about a wrap and only half saw themselves offering investments in this style. - The mind set of the average UK investor is not favourable in current market conditions to try something new. - The Government has a strong desire to extend the 1% CAT standards The wrap service providers have an uphill battle to convince the distributors of the benefits and to stimulate the appetite of the investor for something new. As well as overcoming these issues, the second and equally critical challenge for the wrap service provider will be the development or purchase of technology platforms capable of delivering the wrap functionality required to support the needs of the investor, advisors, wrap service providers themselves, manufacturers and administrators. Fundamentals must include: - The capability to present consolidated portfolio views for the advisor and the investor, - Seamless interfaces to underlying product administration systems, - Online trading interface capabilities for the underlying assets regardless of product type, - Support of regulatory requirements such as "know your client" and money laundering. For the advisor and the investor, the presentation layer functionality, its ease of use and its ability to create a single view across all products is the key to the success of the platform. For the wrap service provider, the key will be to ensure that there is sufficient functionality to entice the advisor and the investor in the first place whilst ensuring that the platform is cost effective. Remember, the wrap concept says goodbye to the days of event based commissions for advisors and administrators, the wrap introduces a flat fee payable by the investor regardless of the activity. One major functional component that must be considered by the wrap service provider is the introduction of aggregation services within the operational functionality. This will allow many like orders from many investors (by Fund for example) to be consolidated into bulk orders in a nominee name and then place in the market. Not only will this significantly reduce the administration costs for trading and settlement for the wrap service provider, it will also allow them to negotiate better commercial terms with the fund groups; resulting in greater revenues and therefore keeping the wrap fee as low as possible for the investor. The UK industry has created a clear differentiator between a manufacturer of products and funds and a distributor of product and funds. In reality a wrap is more closely defined as a service rather than a product and is creating a space in between the manufacturer and the distributor. One of the other hurdles for the wrap service provider, is how do they share the wrap fee amongst all of the parties described. More importantly, how do they convince the investor that the wrap functionality is worth more than the 1 per cent fee that has become a benchmark for retail financial products. Because of all the parties involved, a 1% fee for a wrap will not be sustainable, nor are the rates seen in the US and Australia at 2 - 2.5% realistic. 1.5% - 1.75% seems more realistic, but even with these relatively high fees, it may limit the target market to the mass affluent. Furthermore, the Advisor's and IFA's will need to extend there current product set and demonstrate that they are delivering value via broader enhanced services by introducing products such as banking, mortgages, protection insurance and administration services such as tax returns. Interestingly, the tax return service being the main driver for wrap in the US. The winners in this market will be those who can get the platform systems right, ensuring it is functional and "simple" to use, gives a consolidated view of the investors portfolio, the right blend of decision support tools, data feeds, relationship management tools and the right depth of products. There is a market out there for the wrap service provider. It is unlikely that an IFA will use more than one platform and they will remain "loyal" to a wrap service provider and if wrap gains the market space we expect, this is another catalyst for the change in IFA/Advisor mentality from " I sell" to "I serve" and their revenue will be based on service and client retention and not how much they can sell; surely this is good for all of investors? Will wrap be the next big thing in the UK and will it fundamentally change the approach of the IFA or is this the sequel to the blockbuster that simply fails to earn the revenue; is it a wrap ? Key Points: - Wrap has a proven track record of success elsewhere, - Many of the conditions for wrap in the UK are in place, - Wrap will introduce the concept of a service provider to the UK, - We need to convince the investor that the wrap service and associated fees are "value for money", - The IFA will move from "I sell" to "I serve". Stephen Evans is Product Development Director for JP Morgan FundsHub. JPMorgan FundsHub provides multi-manager trading, settlement and reconciliation services to a number of European Bank and Insurance Companies. "GREEN SHOOTS" OF RECOVERY IN THE CITY? After nearly three years of doom and despondency in the City with falling profits, cost reductions and large-scale redundancies is there light appearing at the end of the tunnel? As a new recruit to the Bluerock Management Team, the last couple of months have been spent meeting senior Business and IT executives across the City and I sense a cautious mood of optimism returning. Buoyed by good Q1 results (continuing into Q2) fuelled primarily by excellent Fixed Income markets, executives are looking forward with more confidence to the next 12-18 months. There is still a cautious approach towards new investment, but budgets are being released and within the major banks the focus is moving away from cost reduction to cost containment initiatives. Cost/income ratios as ever are under scrutiny and proactive strategies are being implemented to mitigate the event that the boom in Fixed Income markets come to an end. In IT, investment is being targeted at outsourcing and off-shore development initiatives and the new regulatory changes such as Basle II and IS39. BCP and IT security are also high on the agenda given the post 9/11 world we live in and the current uncertain international environment. Overall both internal and external investment is on the increase and, whilst a major upturn in the City is unlikely in the short term, there is reasonable cause to be optimistic that gloom of the past 3 years is lifting and the first "green shoots" can be seen of a slow but steady recovery.