Making the choice selection

At the time of writing this article only one of the three forums on administration systems (wraps and master trusts) had been held.

While it was only the first of three, it further confirmed my views that the future is all about choice - for the client, for the adviser, for the dealer, for the suppliers of services (including administration managers) and even for the fund managers. However, many groups are are yet to realise this shift, including the regulators, the FPA and most advisers.

Regulators are still struggling with Mark I type wrap accounts; most advisers know very little about wrap accounts; and the FPA is worrying about other things. This is in stark contrast to fund managers who were urged into action some twelve months ago by

Rothschild legal manager Adrianna Bisogni, who said at the time: "that the emergence of wrap accounts was going to have more impact on the industry than the Managed Investments Act (MIA)".

The simple reason is choice. Technology has allowed custody services, which have been delivered to high value clients by trustee companies for many years, to be delivered efficiently by almost anyone for anyone. This will profoundly change our industry. Wrap accounts are just the next step in the evolutionary process. Technology is allowing choice - how and whom to buy from and when and what to buy. (This will be the topic of a subsequent article.)

In many ways, the earlier wrap accounts modelled themselves on discretionary master trusts. Unfortunately, ASIC has considered them as similar, and as a result, regards them as an investment product rather than an administration service. ASIC will argue that there is very little difference between the two when they provide for investment into wholesale funds (pooling of funds and indirect ownership). And it is wholesale funds that are the strength of master funds and the weakness of wrap accounts.

The use of wholesale funds in wrap accounts weakens their effectiveness because in most cases only cash can be put into or taken out of a wholesale fund. This diminishes portability and has CGT consequences.

Wraps should use retail product. Ah! But what about price? Retail products will get cheaper, and dare I say unbundled with variable pricing. Wrap account administration will also get cheaper. ASIC is already considering differential pricing for unit trusts.

Also, the use of wholesale funds requires the administration to be centralised, whereas retails would not necessarily require a centralised administrator.

Most dealer group principals and advisers are yet to realise that the wrap account provides them with the opportunity to re-engineer their businesses. For dealers, the wrap account provides them with a centralised database of not only balances but also transactions. Compliance needs to be managed differently - the wrap facilitates discretionary trading.

Advisers need to rethink what skill-base they now need in their office and what information they really need to keep locally. They also must come to terms with the reality that their clients will demand access to their own details through the Internet.

The days of advisers keeping all the details of their clients' investments and all managed fund details in their PC are numbered. Stockbrokers don't do it; they get the information from the ASX and the share registries. For advisers to relinquish "desktop control" of this information will be very difficult, indeed it will be impossible for some. But it will happen.

Already Intuit has launched the Quicksmart facility that allows for this. InvestmentLink will soon launch a facility that allows for this and may also allow for retail products to be offered at a competitive price through a custody service run at the dealer level rather than by a centralised administrator. Then there is the service launched by Telstra and Syscorp late last year. And, let's not forget Ausmaq.

To the above we can add BT, Connelly Temple, OneSource, Austrust, NM Trustees and soon Macquarie and Perpetual. Flexiplan, Summit and Asgard are soon to add custody facilities. (If I forgotten anyone I apologise.) There is also one about to be launched where the fund managers have to pay to participate. And then there is Merrill Lynch who has built a facility around a very sophisticated cash management account.

What does this all mean? A lot of companies are serious about administration services and putting serious money into them; probably more cash and intellectual capital have gone into their development over the last year than anything else. Maybe Ardrianna was right!

It also means choice. Dealers and advisers will have a plethora of administration services to choose from. Some will be all encompassing - even producing reports directly for clients. Some will be vertically integrated, that is they come packaged with front-end (financial planning) software and research while others will be unbundled.

Some will make it easy for advisers to move their clients out of the structure while others will be near impossible. There will be many more differences, too many to enumerate.

The choice dealers and advisers make should only be made after the business has decided how and what their business is. The choice has to be a business decision based on the future model of the business.

It also means choice for the client. Most of these administration services will be available directly to the public, if not directly then through a discounter. The client will also have choice if they are dissatisfied with their adviser, but satisfied with the administration service.

What choices will a client have who is already using an administration service and they choose an adviser who does not use that particular administration service? Many have asked what they should do. Being a good consultant I say: "It depends".

Unfortunately, this is the right answer. For some groups, the right answer is to do something now. For others, it is better to wait.

As I said earlier, it should be a business decision, but one that has been arrived at only after the business has been thoroughly reviewed. You must first decide what market you want to be in, what services you want to deliver, how you want to deliver them and what roles the various players are going to have. Determine how you should be positioning your business three to five years out and what your clients will want and expect from you.

Some people think that administration services will be run by a small number of well-resourced companies. They think this because they have a centralised view.

I don't think this way. Once again, I believe that technology will allow for choice. Some of the choices emerging do not require a centralised administration facility. There will be open infrastructure that will allow dealers, advisers and clients to have virtual wrap accounts. This should keep the regulators going for a while.

For my twopence worth, I believe the successful future services, whether virtual or not, will be built around client cash management accounts, much like that offered by Merrill Lynch. Merrill's cash management facility cost tens of millions to develop. There is off-the-shelf technology available now that allows dealers and advisers to provide their clients with a complete range of banking services - even more than Merrill's offering.

Once again there is choice. Either take this technology from a bank or acquire it and then choose which bank or banks you want to partner with.

But if you don't choose soon how you want to run your business, the choice will be made for you - and that may not be to your liking.

Tom Collins is a consultant to the retail financial services industry. You can contact him on [email protected]