11/07/2005

Using a wealth management approach to implement a wrap account forms the basis of a very effective wrap service. This approach can be seen as an alternative to traditional wrap practices that have been developed to date. By using a variety of sophisticated wealth management functionalities such as asset selection, 24/7 communications, action planning and agenda setting, the financial adviser can provide huge value to their clients, building trust and an ongoing client/adviser relationship.

Wrap accounts, are still in their infancy in the UK, but the desire to deliver an effective wrap service is becoming more and more prominent as evidenced by industry newspapers and reports. But which business model should this wrap account use in order for it to take shape? What is the best model that will allow advisers to view all their clients' assets and liabilities in one place?

Two Approaches to a Full Wrap Service

Wrap accounts to date have been developed using highly scientific and often complex data to provide fully aggregated portfolios to clients. This may prove to be successful, but it has had little impact since wrap was introduced.

Alternatively, using a wealth management strategy focuses on the advisory side of financial services with the end client seeing the immediate benefits of value added advice and constant feedback. This constant communication is based on information already collected.

Why Do We Need Wrap Accounts?

There are three reasons for wrap being such a key development in the financial services industry in the UK.

The client is demanding services such as consolidated statements, appropriate tax positioning and sophisticated diversification.

The adviser community is looking to drive client loyalty through service and account aggregation, while reducing administration costs, and moving from commission based fee to a single fee.

More importantly, there are £1768 billion (€2752 billion) of wrappable assets in the UK with analysts suggesting that £150 billion will be under the control of wrap platforms by 2008.

Should We Provide Wrap Accounts to Clients?

Many financial services organisations are already providing this type of account at a very basic level. The overall concept of a wrap account from a client's point of view is the management of their assets as a whole rather than as disparate and individual assets. Most good financial advisers take a holistic approach, albeit on paper. The underlying management of these assets encased in life assurance, banking and real estate contracts is where the difficulty in terms of cost and control lie.

But really, it is the client who should feel the true benefit of the wrap account. Many financial organisations have focused on using client-centric approaches, rather then product-centric. The ideas of continuous client servicing through 24/7 marketing and setting short, medium and long term agendas, have been implemented to increase trust, build relationships and increase the financial organisations share of wallet of each client.

Wrap accounts will enhance client servicing, and continue to build ongoing relationships – because it is something that clients want. Wraps will bring added value to the client's portfolio with up-to-date quality information, understanding and efficiency at all times. This is the basis of a good client-centric approach.

Our Clients are Our First Priority

The level of benefit to the end client rather than the adviser (e.g., increased remuneration), will ultimately determine the successfulness of wraps. Charging structures and the efficiency of service are key to providing the client with the service level they are seeking.

The traditional wrap platform is focused on the benefits to the adviser and wrap provider. However, a platform based on this will eventually fail unless wraps focus on client benefits. A client's aggregated portfolio is the ultimate result of the wrap. A client will demand to see all of their accounts, and financial scenario in one place, at one time. But to get this working efficiently, the portfolio needs to be fed continuously with values, making sure that the information retrieved isn't flawed, and that the client's portfolio is maximised at all times. The benefits of this 24/7 monitoring are:

* The perfect portfolio one day can be unsound the next day due to world events and macro changes. The dynamic analysis of clients' portfolios will enable advisers to react immediately to change – and maximise potential benefits.
* Continuous analysis of portfolios means that an opportunity can be spotted, and acted upon provided the risk/reward profile of the client has been identified.
* As clients age, their needs and financial objectives change. The ability to rebalance their portfolio is necessary in order for them to continue through retirement, and maintain their required standard of living. These changes will reflect clients' dynamic needs.

Creating Economies of Scale Becomes Second Priority

A wrap account will essentially create economies of scale for the adviser, because an entire portfolio can be accessed and assessed at one point on a regular basis. Throughput processing, orders, switches and withdrawals from a portfolio can be managed at a fraction of today's costs. Therefore, as a wrap account will lead to the continuous managing of a client's portfolio, the remuneration structure must be implemented to reflect this.

The current fee structure of a wrap account has not been properly defined and it will vary according to the wrap platform provider model. At the same time, many financial advisers are moving from a commission-based structure to a single fee. The company providing a wrap service will incorporate an annual management charge on any investments held. The revenue from this charge will be shared with the adviser through an ongoing commission basis. Therefore advisers will be forced to change this fee structure from commission to assets under management (AUM) in order to facilitate client expectations and service cost. This means that the client pays for the continuous servicing of their portfolio over its lifetime rather than an upfront large lump sum, which isn't justified at that stage.

What is the Wealth Management Model?

Underpinning wealth management service are a number of compelling product propositions e.g. life, managed funds, pensions, savings and investment products, and the client's financial plan. An ideal wealth management solution incorporates a rules engine that takes the information from the client's financial objectives, balance sheet and any underlying products. The solution must then develop a sophisticated financial plan, which drives the wealth management service.

Combining a solid wealth management model, a throughput processing model, and a well-defined administration process allows a one-stop shop for the financial adviser to view their client's accounts in one place and provide holistic wealth planning across all of the client's accounts.

How Does a Wrap Fit into a Wealth Management Model?

By aggregating an individual's financial requirements, assets and liabilities advisers can take a holistic approach to financial planning and advice. Financial products are not sold in isolation, but as part of a portfolio that meets the overall needs of the customer taking account of their individual circumstances preferences and attitude to risk. Wrap facilitates the ability to develop improved advice, based on access to complete information and planning tools. It is the adviser service that creates economies of scale from an "all in on place" model combining existing wealth management practices and elaborating on these practices.

The wealth management model takes wrap a step further compared to traditional wrap offerings. The following best describes the wealth management proposition with the underlying wrap capabilities.

*Retail private client portfolio management service

• Client investments as a single portfolio

• All savings and investments irrespective of tax vehicles

*Flexible investment choice

• Selection from a range of providers/fund managers

• Discretionary and non-discretionary

*Financial planning with advice

• Typically fee based (normally related to value of assets)

• Single charge across multiple products

*High service levels

• Consolidated tax and performance reporting on whole portfolio

• Investment performance, what-if projections, asset allocation analysis risk profiling support

*Straight Through Processing

• Integrated back office administration

• Exception management

Conclusion

It will be important to understand the impact of a wrap account to an organisations business from the immediate and future point of view. The immediate impact will be an analysis of the existing client base to ascertain if wrap services are suitable, and to determine if the firm can sustain a change in remuneration policy. In addition, companies will need to be able to invest in technology, training and possibly recruitment.

With a number of wrap providers established in the UK, but with little results, one must question if these firms have taken the right approach and right model.

The most effective way of doing this is using a wealth management strategy. A wealth management model services the sales and marketing effort of financial distribution firms, with a proven business model. This model creates a compelling service for selling financial service products, providing financial planning services and ultimately wealth management services. This wealth management model forms the foundation of the wrap platform – the ability to aggregate, analyse and create advisory elements that lead to well constructed financial transactions.

The wealth management model, as described in this article allows the flexibility of account aggregation, dynamic analysis of portfolios and 24/7 monitoring leading to constant communication with the client and an improved all around service. This wealth management approach can be seen as an alternative to a wrap account, giving the adviser and client reason to communicate, providing huge value to the client and with little risk to the financial organisation.

About the Author: Ray Young is CEO of 3Q Software Solutions - info@3q-solutions.com