Wrap platforms getting lost in the remuneration mix

Justin Delaney explains why the current debate over remuneration models means the industry is in danger of losing sight of the purpose of wrap platforms.

Wrap platforms are under something of a spotlight at present as the industry awaits news from policymakers about the future treatment of adviser remuneration and fee models.

However, among all of the debate and discussion, the industry runs the risk of losing sight of why we use wrap platforms in the first place.

Providers are being asked more and more by advisers to help them explain to their clients why they should run their investments through a wrap, rather than doing it directly and, therefore, avoiding the platform fees.

The industry is also spending a lot more time pondering what the wrap of the future is going to look like.

To do that I believe we need to take a look back at where we have come from to consider where we are going.

Now seems like a pertinent time to take a step back and ask: Why use a wrap in the first place?

I would certainly argue that no matter what policymakers decide to change in the future, the principles of wrap platforms we live by now will remain intact.

Back to the start

From their inception in the late 1990s, wrap platforms have been an enabler for both advisers and their clients.

Financial advice is important and wrap platforms have always played a strong role in enabling the advice process by helping advisers to manage their clients’ investments with greater ease and efficiency and to provide increased investment choice and flexibility.

These principles haven’t changed, but they have certainly evolved.

However, let’s look at administration first. For advisers there is little doubt that wrap platforms play a vital administrative role.

Wraps act as a funnel for communication from the various investments a client holds.

They capture and process all of the letters, statements and reports that arrive from fund managers, product providers and share registries.

If I look at the investments we have made in technology and people to support these processes within Macquarie Wrap, it is easy to see how the management of these processes off platform would quickly dilute the ability of an adviser to effectively service the same number of clients.

Macquarie Practice Consulting's recent Benchmarking Study supports this view.

It shows that taking client share portfolios off platform and managing them in-house can result in a 40 per cent reduction in the number of clients able to be serviced by advisers, dropping from an average of 120 clients per adviser to 70.

This does not account for the increased staff and systems costs in managing these portfolios in-house either.

These time and cost efficiencies made at the practice level can translate to time and cost efficiencies for the client too.

However, appreciating that saving an adviser time may be hard to sell to the client as a benefit to them, perhaps we need to look a bit further at the administration side to uncover more of the true value.

Wrap benefits

Here comes reporting. Wrap platforms provide comprehensive, accurate and timely tax reporting in one place, and the benefit of that is hard to question.

Tax time for many of us, and of course clients, is a significant headache and wraps can make a real difference.

Having all of the client’s investments in one place means that all of their reporting is in one place too.

That means one set of reports, generated from one central source, which encapsulates everything the accountant needs to know, from cost base information through to all of the income components.

And not only this, wraps can now be accessed directly by the accountant at the client’s request, making tax time a much easier period.

This is a benefit we often forget about or take for granted, but it is one clients can certainly relate to.

After administration comes access. Indeed, clients might be able to directly invest in many things without a wrap, but not everything and certainly not everything so easily.

The extensive options available through wrap platforms now means advisers and their clients have access to some investments they could not otherwise do.

Further to that, it is often at a lower entry point than if they had to gather the minimum investment together singlehandedly.

For self-managed super funds, for example, a vast choice of investments plus the administration we have just discussed is very appealing as it helps create a diversified portfolio while assisting to keep on top of the compliance requirements.

In addition to this, when we look back over what has been a turbulent two years in investment markets, the benefit of being part of a wrap, and therefore part of a bigger investment force, is significant.

Flexible access

Wrap platforms have invested significant funds themselves during this period to participate in legal cases to recoup funds lost in certain investments.

In these matters, the clients have benefitted from the support of large organisations and strength in numbers, which they would not have had as a direct investor.

Beyond access, comes flexibility and transparency. Clients usually fall into two buckets when it comes to their investments: Those who actively want to know what is going on at all times and those who trust their adviser to let their portfolio run, receiving updates at annual reviews.

For each type of client, online access to view their portfolio in its entirety and in one place is a clear benefit. Whether they want to check it daily, once a month or once a year, the client has a transparent view of their portfolio.

For flexibility, the adviser can more easily make changes to a client’s portfolio and choose to, for example, opt into corporate actions for a number of their clients all at once.

This means less administration for the adviser and ensures that the client does not miss out on their election due to short deadlines.

Other tools that enable advisers to further differentiate their offering and add value for clients include features such as individual parcel selection and other capital gains management capabilities.

Then come the fees. At the end of the day, I firmly believe that wrap platforms are an enabler of advice; they should make it easier for the adviser to provide good advice and easier for the client to receive it.

In this way, when it comes to fees, wraps need to accommodate how the adviser chooses to deliver their advice and charge for it.

While this may change in the future due to legislative requirements, for now, wraps should have the flexibility to accommodate choice.

When it comes to funds flowing back to the client, there is a benefit of being part of a wrap that does not exist when you go it alone.

Wrap platforms have the ability to negotiate better rebates from fund managers, which are redistributed to clients.

This is something most wrap platform providers pride themselves on, as it is a key way we can support the adviser in demonstrating a clear benefit back to the client.

The future

So, looking back over what wraps have been up to now, administration, flexibility, choice and transparency appear to be key. While these are all benefits to the adviser, without question, each offers a benefit to the client too.

Looking forward to the wrap of the future, I do not believe these cornerstones are going to change, but rather evolve. Where wraps offer efficiency now, that efficiency is going to take a step up. Where there is choice now, that is sure to grow.

However, no matter where the industry is headed, and if we are all honest, no one knows the direction just yet, I would argue that the fundamentals will not and should not change.

Whatever the world of financial services looks like in 10 years time, I think wraps will still be present, playing the same leading role they do now.

Justin Delaney is head of insurance and platforms at Macquarie Adviser Services.