Wraps and master trusts – A case of all wrapped up with no particular place to go

Wrap accounts have been one of the big conversation starters at recent industry gabfests. Paul Resnik asks if the whole debate is missing the most important person, the client.

The romance of wrap accounts has blinded a small number of providers and potential users into believing wrap accounts are the ultimate ten. In reality, they offer a lot of hard work for an uncertain gain.

To have a seamless integration of product acquisition, custody' valuation, reporting and devolution is, on the face of it, an excellent objective.

However:

if it doesn't satisfy client needs;

if it doesn't save clients money;

if it doesn't fit suppliers best practices;

if it is so complicated that planners and their staff can not develop and run it; and

if there are only a few dealers and planners to use them;

Are we wasting our time? Where is the industry now?

The wrap industry in Australia is at an intriguing stage in its development. There is a lot of noise, but not much volume. Nevertheless, by the end of 1999, there will be at least seven operators providing wrap accounts and seven others providing front-end client management systems.

Australian investors already have access to a vast number of bank, life company and other financial service operators who provide some consolidating service.

While we are over-banked, over-superannuated, over-insured and over-brokered, we are really under-serviced. Try getting any sense or service out of a bank or an insurance company. It becomes immediately obvious the greatest service many companies offer is that they keep a lot of well-paid people off the streets.

Most, if not all, of the products and services are already complex beyond comprehension. While simple may not always be beautiful, there is something really ugly about systems and products that require a PhD in Personal Finance and Computer Technology to get them started.

The pivotal problem is how to bring suppliers, intermediaries and users together in a meaningful way. Most suppliers are too wrapped up (sorry) in their own vision of how things should work, to pay attention to the small details of how things actually do work.

There is a huge and demonstrable need for individual Australians to understand and participate in investment markets. Aside from anything else, they need to be able to keep watch on those who are providing them with financial advice. We need to ask ourselves if the complex and still expensive services on the market fulfil these needs at all.

If I could believe that all of the services provided and the volume of information being spewed out were of value to the end user, I might be less cynical. Do end users really want to see each transaction, FID and BAD charge and small interest payments? Or would they be satisfied to know that there is sufficient money put aside to provide for a comfortable retirement income. Or even that the balance on their account has grown. There is something fundamentally satisfying in watching a balance grow. And wasn't it to avoid confusing and complicated reporting that consolidated accounts were developed? Now we can be confused to an extent never dreamed of before.

Who are the end users?

Over the last few years, my colleagues and I have spent time on better understanding the relationship between clients and planners.

In the process we have developed tools that help clients and planners to make the planning process more needs based. The tools look at identifying a client's financial personality. In addition, we have been developing a communications platform, based on lifestyle needs rather than investment outcomes.

The key legal obligation of a planner (and thus the dealer group) to their client is a Duty of Care and the parallel statute law (sections 849 and 851 of the Corporations Law). In other words they are required to know their client and know their products so they can match products to client needs.

Rising consumerism and client knowledge over the next few years will put pressure on all within the financial services industry to meet these obligations.

Research undertaken by ProQuest, our sister company, in its personal financial profiling risk tolerance test, reveals that close to 70 per cent of the population falls within the categories of low to average risk tolerance. They are not interested in complex strategies to minimise tax because they are afraid of the consequences. In fact, all they really want is to make some money and avoid unnecessary financial shocks.

Without careful education, these investors will want limited options. It is hard to see these people looking to complex portfolio management systems to hold their two capital secure, or balanced funds. In fact, their other most likely investment, an income producing property, can not be easily accommodated by most consolidation services. In the last short while, many Australians have acquired a few shares via privatisations and other listings. Will they see any value in these being wrapped?

Will the remaining 30 per cent of the investment population, not already linked into a consolidation service, be sufficient to support the wrap account entrants?

Who will take-up wrap accounts?

Acceptance of a revolutionary change that requires substantial commitments of time, energy and money, is rare. Most of us prefer to suffer on with what we have, however much we may whinge and complain.

There are two groups, however, that will actively take on change: the early adopters and those who are forced to do so.

Early adopters embrace the revolutionary vision, make it their own and act accordingly. They tend to be already heading down the same path as the vision, and see it as the way to gain results towards their own personal vision.

The other group may be forced into new behaviours to maintain market share, avoid regulatory penalties or literally stay in business.

If we apply this same analysis to the history of the retail financial services industry, what is revealed is a vanguard (oops) of dealers who, in the early 1990s, saw that to survive they needed to wrest control of their business from fund managers. They embraced masterfunds.

We are currently seeing a small number of individual financial planners and a few of the remaining less profitable financial planning groups seeking to establish independent businesses and share in the spoils taken by the principals of SealCorp, Le Fort and Wilson Dillworth. And when BT Funds Management is successfully sold, Deutche Bank.

Caveat Emptor

Successful financial planners (ie big writers) will have been cosseted by their dealers and retail fund managers for much of their professional life. Giving up these comforts for the uncertain world of establishing and running a wrap service needs to be carefully assessed.

They also face the issues of transferring existing clients onto any new service.

Many planners have just finished convincing their clients that multi-manager masterfunds are the way to go. How can they now tell them that wrap accounts are the better way?

Do you, as dealer groups or planners, have the enthusiasm, patience, staff, energy, brain power and cash flow to bring the all-singing, all-dancing vision to fruition?

A recent wrap service converter admitted that it took 12 months longer than planned and over $1 million more than originally budgeted to deliver their service to the market place.

Is a wrap the way forward?

Over the last few years, we have been involved in a number of master fund and wrap account implementation projects. In the process of this work, we have identified a number of issues that we sought to resolve with our clients.

The first, and most important one, is: "Are you creating a wrap service for the right reasons?" Are you buying the sleek, Italian sports car for its sexy good looks and throaty muffler sound? Or should you be acquiring a humble Hyundai that actually suits your family's needs?

When you break down the players in the wrap/master fund arena, you end up with customers, dealers, the owners of dealer groups, planners, assistants and paraplanners, custodians, administrators, and service suppliers. Among them, there must be more than 50 important issues that need to be addressed. And that is before you get into the investment issues, such as will the service cater for direct investments, managed investments, insurance (investment and risk), banking (cash, term deposits, loans, credit) and the provision of research.

In conclusion, it seems that we are about to be inundated by a plethora of wrap accounts. The question is does anyone want them?