Fewer than one in five IFAs in the United Kingdom have even heard of “wrap services,” despite the fact that a number of leading providers intend to introduce such products in the next 12 – 18 months, according to Datamonitor research commissioned by JPMorgan FundsHub.
Wrap services bundle various investment products (pensions, life insurance, mutual funds) so they can be managed as a single portfolio. Despite the low level of recognition among IFAs, once the wrap service concept is established, IFAs will be essential to ensuring they are widely accepted.
The concept of linking a number of products is becoming increasingly popular within the banking and mortgage market with propositions such as Barclay’s Open Plan and Virgin One accounts. However, the new wrap services now being envisaged will be significantly more sophisticated, says JPMorgan FundsHub. They will allow a broader range of financial service products with different tax treatments to be actively monitored and managed by IFAs and their clients through a single product platform. The overall wrap product structure is likely to be offered by major banks or insurance companies and will allow the clients’ total underlying assets to be treated and actively managed as if they were part of a single pool of assets. Clients are likely to be charged a flat percentage fee irrespective of the tax-wrapper or underlying asset type employed in managing their affairs. A significant element of this annual fee would then be paid to IFAs as trail commission for providing ongoing advice and asset management services to their client.
Yet there is much to be done before wrap services take off. The JPMorgan FundsHub survey found over three-quarters (77%) of the 100 representative IFAs surveyed were unfamiliar with similar wrap services offered in the US, Australia and South Africa. Of the IFAs who said they were familiar with how such wrap services would work and would be interested in offering them to clients, 39% said they would be prepared to actively manage their clients’ assets themselves. This indicates an increasing willingness of IFAs to derive their revenue from offering ongoing services to clients rather than rely on their initial sales commissions.
The research revealed that technology will be crucial to making wrap services a success. Now the technology is more fully developed, IFAs and their clients know that their fears over security will be allayed, as well as the new web-based platforms being capable of handling settlement and moving monies between different financial products.
IFAs had no consensus view on which investment categories should be the most important ones sold within wrap services. When offered the choice of mutual funds, direct equities, bonds and property, 30% of IFAs declared that all of these should be included. Twenty two per cent said direct equities should be the crucial component, while just 11% preferred mutual funds. Of the remaining respondents 19% had no opinion on what constitutes an optimal wrap service.
According to JPMorgan FundsHub, the conditions are now in place that favour the introduction of wrap services. As well as the technology, these include pressures for regulatory reform (CP121 & the Sandler review) and the increasing knowledge and appetite of consumers for more sophisticated means to manage wealth and conduct financial planning.
Already a number of companies said confidentially that they expect to launch wrap services in the UK in the next 18 months. But by 2003/4, JPMorgan FundsHub predicts the market will be able to offer a much wider choice of wrap services.
Mark Lund, Chief Executive of JPMorgan FundsHub, said “IFAs should prepare for questions from customers about wrap services, as we are confident that they will become as popular here as they are abroad. We believe that wrap services will help IFAs command a much greater respect from their clients, because of their enhanced advisory and management role.”