The FSA wrap paper

Initial soundings indicate that the FSA paper on wrap indicate that IFAs will rethink their strategy on platforms.

There is now a very limited choice of platform provider for any given approach.

For example:

• An adviser wishing to adopt a pure wrap approach with basic non-brand wrappers is restricted to Transact
• An adviser who wishes to adopt a pure wrap approach and be certain of retaining independence, arguably has only 7IM or Raymond James as options
• Will IFAs use platforms as products?
• Will they buy life products and SIPPs off platform?
• Will decisions to migrate to a wrap model be postponed?

Or will they put independence to the sword and follow their chosen strategy?

We are about to conduct a study on this, but here are our initial thoughts.

The FSA are reluctant to intervene. Yet by adopting a “current rules apply” approach, it is likely that they will impact on the behaviour of advisers.

Investment bond and personal pension wrappers are regarded as packaged products and not wrappers. In some cases this is certainly true. Both Cofunds and Fundsnetwork have opted for big brand insurers, Legal and General and Standard Life, as their wrapper providers. These are not pure, open architecture wrappers – they are in effect semi-open architecture products. We assume that advisers will use them as they have used insurer products but with the advantages of more open architecture, plus full aggregation and reporting across all investments.

We understand why such products should be subject to the packaged product ruling. They have specific charging and structures similar to the products that they replace.

This should not be the case with a pure wrap. In their “Little book on wraps”, Transact describe the wrapper thus, “In effect, the wrapper becomes an empty box that enjoys certain tax privileges, into which the adviser will place assets that are allowable, and which the adviser think best suit the client’s needs.”

It seems to us that if the wrapper is merely an empty box, albeit provided by an insurer, as necessitated by tax law, it should not be regarded as a packaged product – so long as the charges are in line with other wrappers.

The administrations charges of wrappers should be treated in a similar way to the charges of a discretionary manager – and many IFAs place all clients through them.

However, providers do not necessarily agree – or rather they are confident that advisers can use their platform and retain independence.

This is the Transact view from Malcolm Murray:

“Advisers are required to consider products from the whole of the market if they wish to call themselves independent.” This has always been the case. The question is then how does the offering within the wrap compare with the whole of the market? The key is then contained in its next statement - "When giving advice on purchasing a packaged product through a wrap service, (note the use of the word service) you may well find that it is relevant to consider the potential advantages and disadvantages that will arise as a result of purchasing a packaged product through a wrap, and the wrap's terms and conditions, rather than considering a packaged product in isolation"

If you consider that this comment follows on from the opening remark that placing a large volume of business through a single wrap does not mean that the IFA will be automatically penalised one can see that although the independent adviser is required to consider the whole of market he can also take into account the advantages of a wrap service when making his recommendations to a client. These advantages might include being able to buy the collectives at a lower price, consolidating all investments on to a single platform for valuing, reviewing and managing a client's financial affairs. In other words the service aspects are also a legitimate consideration. Of course, if the adviser concludes that for certain packaged products the wrap service is not suitable or it does not offer them, then alternative sources will be required whether or not these are wraps, pseudo wraps or not wraps at all.

Cynthia Poole of Raymond James says:

“We have to say we are in agreement with the FSA’s position on this point. They are looking at it from the customer’s perspective rather than from the product provider’s perspective, which we believe is appropriate. A financial planner needs to look at each client’s individual circumstances and make decisions appropriate to the client’s needs.  This includes choosing the right solution in terms of a tax wrapper provider.

Wrappers have different characteristics and charges that should be considered in the selection process for each client. Therefore, if a financial planner uses a platform where only one wrapper choice is available, by definition, he/she cannot choose amongst alternatives.  Therefore, the financial planner would be driven to use multiple platforms.”

Justin Urquhart-Stewart of 7IM says:

“Professional advisers and planners need choice and certainly won't want to feel hemmed in - after all what may be suitable for a client today may be an embarrassment tomorrow. This must also apply to tax wrappers as well as they will all vary in the style and abilities and some have very specific skills for a certain type of client. What an adviser cannot afford to have is to find him or herself with the wrong type of wrapper - no one would want to stand there and look stupid in an old pair of flared SIPPs. They looked good once but now they are just embarrassing.”

Unsurprisingly, organizations will present views that reflect their products in their best light and seek competitive advantage. I pressed Justin for a totally objective view on wrappers. He kindly responded as follows, and agreed to our using the quote:

“If I want to wrap up a parcel I use sensible brown paper - anything else is just decoration. If I want to have a tax wrapper a plain wrapper is just as sensible and then I can do what I like with it, and without any restrictions and constraints - why would I want more?”

Surely, this is where we need to be?

On 4 September 2006 Ken Hogg, Director of Industry Development at Aegon Scottish Equitable wrote:

"The FSA have taken a big pointy stick, and stuck it well and truly in the spokes of the wrap bicycle, before it got out of low gear. Whether the FSA's guidance is deemed to be reasonable or not is a moot point, and we can expect to see some significant wobbling, to continue the cycling theme, in the near future as the implications of the FSA's guidance on wraps are taken on board by both independent advisers and wrap suppliers. We at AEGON are however keen to continue to work closely with advisers and the FSA to deliver guidance, support and technology to further improve both the efficiency of advisers' businesses, and the offering from advisers to their clients. And we continue to invest to this end."

Email your views.

To see the FSA paper on wrap click here.

Back to top