The influence of wrap platforms in the UK is building slowly but surely among independent financial advisers (IFAs) yet still has some way to go before reaching the levels of interdependence of businesses in Australia, the USA and Canada.

New research reveals a significant positive shift in adviser sentiment towards wraps in the UK over the past three years.

In 2008, a CoreData study reveals more than 70% of IFAs can be classed as ‘believers’ when it comes to wraps, with the remainder classified as ‘sceptics’.

Three years ago, these figures were the otherway around, when many IFAs felt wraps were over-hyped and not the solution to solving their administration woes.

Then, CoreData found that 39% of advisers said they would be an early adopter of wraps – by 2008, this figure had jumped to 84%.

Wraps, which give access to a wide range of possible investment assets and tax wrappers from a single investment platform, together with reporting and administration tools, are becoming more popular with IFAs in the UK.

Why have UK adviser attitudes changed?

It seems that awareness of what a wrap offers has increased, the concept is better understood, and wraps are seen as fitting in with a prevailing trend for IFAs to move towards trail commissions or fees as the main form of remuneration – the so-called ‘new model adviser’.

The range and arguably the quality of the wraps on offer has also increased.

Major life and pension companies such as Standard Life and AXA have entered the UK wrap market, while existing players such as Transact have continued to pick up business.

Start-up operations like Ascentric and Nucleus have shown there are alternatives to a product provider wrap, while fund supermarkets such as Cofunds and Fidelity Fundsnetwork have added functionality to upgrade their offerings.

As a result, more IFAs now perceive wraps as being very beneficial in terms of administration, reporting, client management, offering an online system and offering more competitive fees and charges.

Among the wrap sceptics, the potential benefits of a wrap are less widely appreciated and the overall view of wraps is less positive. These advisers require more convincing and, perhaps, a platform more closely aligned to their needs.

However, the potential growth for wraps is clearly substantial. Just over three-quarters of advisers think that a wrap is necessary, even if the adviser already uses a fund supermarket or other investment platform.

And the amount of adviser business being put onto wraps is still low in the UK. Sixty-five per cent of advisers are putting less than 25% of their firm’s total business onto a wrap and the proportion of advisers putting over 75% of their firm’s business onto a wrap is less than 10%.

These figures show that much still needs to be done to convert advisers to using wraps and to get assets onto their wrap platforms.

In Australia, often lauded in the UK as the model for wrap usage, it took approximately 10 years of pain for wraps to become widely accepted, with four of the first five entrants into the market going broke. Anyone who thinks that wraps are a panacea and that their implementation and adoption in the UK will be a simple process is likely to be disappointed.

Indeed, the Australian pension system and associated legislative changes were significant drivers of wraps down under.

Superannuation, which brought in compulsory pension contributions from 1984, has created a AUS$1 trillion pool of savings that needs managing and it also led to stricter regulation for planners, the Australian equivalent to IFAs, leading many of them to outsource back office functions via a wrap.

Over time those planners on the fledging platforms started to become highly profitable and fund managers and product providers realised the benefits of wraps. For product providers, wraps became important as a distribution channel, while advisers could move from being the financial version of a ‘Mom and Pop’ corner shop to being a branch of MacDonalds, with more a efficient operation.

In addition, by placing their business on a wrap, Australian planners made their businesses easier to sell, giving them an exit strategy.

Using the ‘right’ platform can double the price buyers will pay for a financial planning practice, as they know far less work is needed to integrate the new practice into their own.

Another key lesson for the UK is the success of baby wraps, which offer a limited choice of around 50 funds and model portfolios, in Australia. Colonial First State entered the market late with first ‘baby wrap’ having studied the competition.

A cheaper, more efficient product, it caught the rest of the market offguard and showed that many advisers and their clients wanted the wrap version of a cheap runabout rather than a luxury saloon, even for relatively wealthy clients.

The Australian experience also demonstrated that while planners might give the choice of funds, or other product features, as their stated reasons for choosing a wrap, the unstated reason is the financial package. A large part of the reason why Colonial First State’s baby wrap took market share was that if offered advisers a low cost to the client coupled with a high remuneration rate to planners.

The North American experience gives another perspective on wraps. According to International Money Management Institute executive director, Lisa Langley, wraps in the USA and Canada offer consolidated reporting across all products and services, which includes funds, securities, structured products and exchange-traded funds. Open architecture with very few restrictions is the norm, discretionary fund management is often part of the offer and platforms can handle either fees or commissions.

Langley said that the UK lags behind the USA in terms of the industry infrastructure supporting wraps and that this is the real difference.

“UK platforms are making good strides, with still less than the majority of the adviser population participating in platforms actively. Once fund transactions are properly sorted via a centralised exchange or clearing service in the UK, then platforms will need to be more value-add focussed”, Langley commented.

Administration by life offices in the UK is notoriously poor and re-registration of assets between different wrap platforms is a growing issue.

A standardised approach to this could help IFAs move between platforms, allowing them to consolidate the assets they advise on.

As a possible example, the corporate defined contribution pensions market in the UK has recently set up an market standard for straight-through-processing using the SWIFT network and the ISO20022 standard.

However, some experts believe that it may not possible to justify the cost of automating complex and infrequent re-registrations in the same way as high volume, low value pension transactions.

Both the USA and Australia show how the UK IFA could develop over the next few years, with wrap platforms playing a greater role. However, while aspects of the UK market can be compared to other markets, it also has its own characteristics which make it unique.

For example, from 2012 personal accounts are to be introduced as compulsory pension vehicle. This could increase the pool of savings up for grabs and hasten moves to automation, but its critics fear it could damage current pension arrangements.

At the same time, the UK Financial Services Authority is pressing for reforms to how IFAs operate under its retail distribution review and it is also seeking to improve the experiences of consumers through its ‘treating customers fairly’ initiative.

For wrap providers and IFAs in the UK, the next few years look like being a period of continuing change, but with wraps firmly on the agenda as tool for change.