Practice Management – Back office freedom comes with a price

Being an adviser is a tough job these days. Not only are advisers responsible for helping their clients to increase their wealth, they also need to focus on the value in their own business. While outsourcing administrative and back office functions can make life easier, it does come at a price - as Anthony Hunt reports.

Increased technology and compliance costs, product manufacturers dictating terms of trade, savvy clients with high service expectations - these are just some of the commercial realities facing advisers today.

Couple those realities with the need to maintain efficient administrative and back office systems and it comes as no surprise that the only choice for many advisers is to outsource.

It also makes sense when you look at the way financial planning businesses are valued. The practices getting the higher multiples are those that can demonstrate a sound business base. This includes maintaining computerised records of client, portfolio and business data, and demonstrating a clear history of recurring, diversified income from a stable business platform.

But there are many options to consider, including the now-traditional master trusts and the fancier new "wrap" accounts.

There is no doubt that master trusts provide consolidated administration of the client's assets within the master trust portfolio. Typically, master trusts provide good reporting, administration and transaction management capabilities, allowing advisers to focus more on advice and client relationships.

However, master trusts have some limitations. First and foremost, master trusts have capital gains tax (CGT) implications. A client who wishes to transfer their portfolio into a master trust must, in most cases, convert the portfolio to cash and crystallise their CGT position so that they can buy units in the master trust (even if the underlying assets are identical on entry).

The other major issue is the legacy portfolio problem, which affects the adviser more than the client. Once an adviser has made the decision to use an outsourced administration service, they are faced with the difficult task of managing portfolio information originating from a number of sources, until all clients have been transferred. One of the main attractions of outsourcing can therefore, in the short to medium term, make things even more complicated.

Another problem with master trusts involves having to modify the recommended product list to suit the master trust operator. It may well suit the operator, but does it suit advisers and their clients? In addition, creating a relationship between the master trust operator and the client may not be conducive to the advisory relationship.

The other option to consider for outsourced portfolio administration is a wrap account. Let's be clear about what a true wrap is - it is a custodial administration service where clients' assets are held and administered on their behalf by a custodian/administrator.

There seem to be many master trusts jumping on the "wrap" bandwagon these days. Typically these are discretionary style master trusts where the client and adviser can nominate underlying assets rather than just an investment strategy.

However they still have a master trust structure and hence have the same problems as master trusts.

A good wrap account will provide full custodial administration and transactions for a wide range of asset classes as well as consolidated reporting across different ownership structures. A wrap should offer clients the benefits of accessing wholesale products, but not leave the adviser with the legacy portfolio problem - assets outside the service.

Wraps have one clear advantage over master trusts in that they don't have CGT implications. Assuming the custodian is prepared to accept the assets, transferring them from the client's name into the custodian's name does not change the beneficial ownership of the asset, hence there is no CGT impact.

Similarly there is no CGT impact when transferring the asset out of the wrap back to the client's name (assuming the product can be transferred).

Many wraps do have limited list offerings, just like master trusts. However some wrap providers offer an "open" service - meaning they don't restrict the assets that can be administered within the portfolio.

Another point of differentiation between the various wrap providers in the market is the extent to which they have a relationship with the client. Some have a strong relationship, often based around other products the wrap administrator also supplies, and others are prepared to allow the adviser to maintain the relationship.

Many master trusts and wrap account operators also provide additional ancillary front office and business support capabilities for advisers. These services can include support tools for asset allocation and rebalancing decisions, research, client and prospect management tools and workflow tools. There are also specialist support services that provide only these services, although they tend to link up with other portfolio administration providers.

Increasingly, more web-based tools are also being offered to advisers. These tend to look impressive and can be useful for facilitating transactions, but they have limitations. One limitation is they don't provide ongoing asset administration like a master trust or a wrap account.

There are many different sorts of solutions available for an adviser these days, most of them promising to make life easier. The best option depends on the adviser's or the dealer's specific requirements. Wraps are arguably the most flexible, but that level of flexibility can come at a price and may not be appropriate for all.

<I>Anthony Hunt is general manager, Perpetual Portfolio Services.