Wraps and master trusts – Wrap or trap – understanding the difference

In discussions with financial planners about wrap accounts, it is clear that their full ramifications, potential difficulties and the totality of possible benefits are not fully understood.

Any financial planner still contemplating using a wrap account to help their clients and their business needs must understand what the characteristics of a good wrap account are. Otherwise it could become a trap account for their business.

The questions planning groups should ask when assessing a wrap account should be in two categories. Firstly, how well it helps you satisfy your client needs and secondly, whether it enhances your business.

The questions about the characteristics a wrap account needs to support your client services include:

Does it offer full reporting? Will the wrap account be able to record and report on all the client's assets, regardless of the investment vehicle being used?

If every asset is not captured, how does it help you manage strategic asset rebalancing for a client's total portfolio? From a client's point of view, the total picture is expected including assets they may have in a superannuation fund, their own name or those held in a family trust.

Receiving reports only on assets held through a particular master trust, or only those managed funds that lend themselves to the reporting system, is not going to satisfy clients, or help them make sensible future investment decisions.

What transacting ability does it have? It also follows that any wrap account should be able to transact on the widest range of assets in various classes, whether they be direct equities, managed funds, fixed interest products or debentures. It should also be able to report in detail on actions such as rights issues, bonus issues, and returns of capital.

How does it handle cash collection? The wrap account you choose should naturally manage the cash collection from each asset held in a client's portfolio.

Is it tax intelligent? It should address the capital gains tax position of every holding and help you advise your clients so they can make sensible tax related decisions about buying and selling particular assets.

Impact on your business

Having assessed the various wrap account offerings on the basis of how they provide the required client service levels, they should now be assessed on their impact on your business.

This is where the trap can be sprung if you are not careful. Choosing the wrong supplier can affect your relationship with your clients; the attractiveness of your business (and consequently its sale value); and the security of your income and margins.

Does it change relationships? Will the wrap account you choose change your relationship with clients? In other words, will the wrap supplier end up with more client information and more points of contact with clients to the detriment of your own client relationships?

What is the impact on your margins? At first glance, using the services of a wrap account supplier might be initially very attractive as your share of the margin may increase. But what if, at some future time, the supplier elects to change the relationship and squeeze your margin?

Is it really going to be practical to switch wrap supplier again? What will the impact be on clients and, in particular, your relationship with them? What happens if your next supplier wants to do the same thing themselves in a few years time?

Who is the wrap working for? Will the wrap account you select be working mostly for you or someone else? Is it mostly gathering assets for someone else such as the wrap account provider or is it helping you with useful business information, such as helping you manage fund manager concentration risk.

Will it enhance the value of your business? Will it help in the consolidation of your business as a fee-for-service business? Will it transfer revenue more directly into the business and leave it less reliant on the fees of fund managers?

Will the wrap account secure your margin? Most financial planners are aware of the pressure on margins, and indeed some are looking to wrap accounts as a way of protecting their margins. But will the wrap account you select achieve this for you? Or are you simply surrendering control to product manufacturers?

Is it a useful business tool? A wrap account should be a useful business tool that addresses the back office needs of your business and also support your front office needs. Does it give you programs such as practice management systems - for example contact management, rebalancing, and a what if analysis toolbox.

Practical solution or wishful thinking

In my view, what many planners see as a wrap account is only half a solution giving only half the potential benefits. But it's not all wishful thinking.

There are some wrap accounts that can provide the total, client supporting and business enhancing solution outlined here. The Perpetual Services Network is but one example, although I have still yet to see any local offering that provides more to a planning firm and its clients.

Wayne Wilson is group executive at Perpetual Private Clients.