Wrap platforms: The big freeze

Peter Davy on why wrap platforms have not taken off as predicted despite their numerous merits

The advantages of wrap platforms are obvious. For the customer they offer an unprecedented overview and control of their investments, savings and pensions, and the possibility of a far greater choice in terms of managers, providers and asset classes. For the IFAs, greater automation, much improved efficiency and the potential to offer almost instant valuations, for example, means lower costs and the ability to offer a better service. In short, it should mean they can spend more time actually advising their clients and rather less on paperwork.

It's not surprising then, that there's long been some excitement over their potential. With experiences in Australia and America showing their promise, many predicted an explosion in the take-up of wrap.

As far back as 2004, Datamonitor was forecasting that wraps would hold £150 billion in assets by 2008. A year earlier, a survey by Abbey for Intermediaries found that 90 per cent of financial advisors expected wraps to be part of their everyday business by now, and two-thirds reckoned they would account for up to half of their annual revenue by 2010. Watson Wyatt said they would "revolutionise" the pensions and investment market.

Yet, to a large extent, it hasn't happened. Of course, there has been progress – just look at some of the launches this year: Axa with Elevate; Novia have soft launched; Macquarie is coming soon. Some existing players are also faring well; Transact, for instance, passed £5 billion under management; Nucleus says it has three times as many advisors signed up as it had planned for by this stage. And it's certainly touched on the pensions market. Nucleus, for instance, says that about half the wrap's money is in pensions vehicles. As Toby Strauss, who heads up Norwich Union's Lifetime wrap, says "The market's now starting to get some traction."

Nevertheless, Norwich Union has long admitted that wrap in the UK has developed more slowly than expected, and Strauss concedes that to an extent this remains true despite all the hype. "It's still a relatively small part of the market," he points out. It's an assessment that's widely shared.

"It remains limited to high net worth individuals on the whole," says Christopher Read, chairman of pensions technology group Dunstan Thomas. "It's not really moved much beyond them."

Why this is so is open to debate. Partly, reckons Read, it is a supply-side issue. Only when the high street banks, with their precious footfall, get really involved will wraps take off, he predicts, and unfortunately, they've got other things on their mind at the moment. It's also true that some of the other offerings have taken longer to come to market than the early predictions foresaw. It's been easy to underestimate the difficulty, and cost, involved in developing the platforms – a fact that even some of the providers concede. The complexity of the UK pensions market has added to this.

On the other hand, there are a decent number of providers now in the market and some even argue that it is oversupplied at the moment. In fact, it could be the number of suppliers that's making some IFAs hesitate.

"A lot of people are probably waiting for a bit of a shake out in the market to see who's really going to be there for the long-term," suggests Roger Breedon, a principal at Mercer. "Only then will they decide who to partner with." After all, he adds, it's not impossible to change partners later on, but most would rather avoid it.

In any case, few deny that – whatever the situation on the supply side – the real demand for wraps is yet to come.

A tricky time
Lately, of course, that's down to the same factors that have the banks focussing elsewhere: there's simply not much demand for investments. In fact, that's why pensions are likely to play an increasingly significant role in the uptake of wrap platforms going forward. "After all, the cash is still coming into pensions," points out Breedon. "They're going to be central to it."

If so, though, there's plenty of scope for growth. Because, as David Moffatt, business development manager at State Street Corporation and DST Systems joint venture International Financial Data Services, says, the significant penetration in the pensions market is in many respects "the element that has yet to come". While the platform market has made decent inroads into the retail market for mutual funds, pensions have lagged.

For some, this simply points to the limitations of wrap.

At IT solutions provider Mastek, business development director Steve Williams says many struggle to cope with the full range of products today's baby boomers need for their retirement planning.

"A lot of them offer an income drawdown solution, for example, but that's only half the story," he says. "They don't easily allow the inclusion of guarantee and protection products, with the underwriting processes and reassurance functionality that these products require, but they need to accommodate these and the whole range of retirement products."

More generally, the legislation, product requirements and product features in the UK are incredibly complex. Indeed, that's one of the reasons that bringing solutions to the market has taken longer than many expected, and it still means that transferring existing business onto wraps can be a huge challenge. "That's one of the problems," remarks Phil Hodges at pensions administration solutions provider aquila. "Wraps in the market today are really only attracting new money, whereas an awful lot of the assets in the market are existing money."

Time will tell
Not everyone agrees, though. Mark Polson at Standard Life reckons the limitations of wraps are overblown.

"We support drawdown out of a SIPP and fairly sophisticated income flexibility," he says. It doesn't have a variable annuity on the platform, but, says Polson, "it isn't a priority for advisors at the moment". It will come in time, he reckons, but there's little sense of urgency. "A lot of these third way products are much talked about but little used," he says, and maintains that it's not what's hindering greater uptake. Instead, it could simply be that expectations have been too high.

"It's not a magic bullet; it won't solve all known ills; and wrap is not suitable for all providers," he says. Perhaps. But most, including Polson reckon the advantages of wraps will see them enjoy a far bigger share of the market – eventually.

As Breedon puts it, "Perhaps they're not the universal panacea some expected, but it's still the right solution for a lot of business.

- Pensions Age November 2008