Wrap accounts are gaining popularity in the UK. Datamonitor (DTM.L), an independent market analyst, revealed in a new report that an estimated 150bn worth of assets could be under wrap administration in the UK by 2008. Wrap services have been popular for some time in the United States and Australia but is only just starting to break into the mainstream financial market in the UK.
‘The year-on-year growth seen in the US market in recent years of 40% is not likely to occur in the UK for another five years. However, if wraps are as successful as they promise to be, then growth of this strength could potentially be achieved,” comments Alan Shields, Financial Analyst at Datamonitor and author of the report.
The attraction of wrap accounts for investors is that they offer an uncomplicated, flexible and simple service. Investors or their advisors can view all their financial assets on one platform. These can be analysed and quantified according to money value, tax treatment, product type and asset allocation. Online availability also means portfolios can be checked 24 hours a day. Wrap accounts have been popular for some time in the United States and Australia, where total market sizes are USD750bn (GBP400bn) and AUD300bn (GBP125bn) respectively.
Datamonitor estimates that ‘wrappable” assets in the UK (those assets that could be held within a wrap account) amounted to GBP1, 768bn in 2002. The size of this pool of assets indicates the potential opportunity that exists for successful wrap platform providers.
The speed with which the wrap market develops will dependent on the implementation of the new regulations, namely Sandler’s recommendations on commission bias, the Government’s Green Paper on the simplification of pensions and the FSAs depolarization proposals, all likely to be in effect in 2005.
At present, there is a commission bias, banks are only allowed to sell the products of one provider, and pensions products remain complex and unmanufacturable for wrap platform providers. The regulatory changes will enable wrap accounts to remove the reliance on commission by offering a flat fee that is a percentage of assets under management. In addition a simpler pension structure will make pension assets more readily consolidated and easier to manufacture, all of which will benefit the wrap model, and increase demand. Depolarisation will put banks in direct competition with IFAs and wrap accounts will offer IFAs a means of reducing their overheads whilst becoming more competitive.
“All of these proposals are as yet incomplete and un-enforced, slowing down the development of wraps. Indeed, if these proposals were scrapped, the benefits of wrap services would be undermined at every level,” comments Shields.
Datamonitor forecasts that if these regulations are implemented as planned, it is likely that assets under administration within “wrap like” services will grow to a value of approximately GBP150bn by 2008.