By Nic Burton, Head of Mareting - Aviva Wrap

Wraps, platforms, fund supermarkets….…the absence of a common language has complicated matters, hasn’t it? And, if we have found it complicated, heaven help our customers. What is clear to me though is that there is a general distinction between:

Fund supermarkets – whose primary source of income is derived from retaining a proportion of the retail fund rebate, and, Wraps – that have tended to pass all rebates to customers, and generate revenue through a Wrap charge

In the case of fund supermarkets, the customer has tended to pay the retail fund price, with the tax wrapper at either nil or relatively low cost. The cost of advice is partly implicit as it flows through from the underlying fund. In the case of Wraps, the customer has tended to buy retail or institutional funds at a significant discount, with rebates flowing to a customer cash account for reinvestment. There is normally a separate Wrap or product charge based on assets under administration.

Over the past decade, the fund supermarket model has dominated the new business income flows – with a few major fund supermarket players representing around 85% of the intermediated market. This has revolutionised the market and bought fresh and new ideas. However, I believe that this is about to change – and it is now time for advisers to consider Wrap?

While the fund supermarket model has undoubtedly been very successful, I believe that it is now at risk on a number of fronts – and I’m going to talk about three of them.

Adviser charging

For investments, the FSA has already made its intention clear with respect to adviser charging. Commission will be banned and adviser remuneration will need to be customer-agreed (CAR). CAR can be paid by the customer directly to the adviser – or through a ‘sufficiently flexible’ adviser charging option offered by the provider.

The trouble is that, in the fund supermarket model, trail commission is implicit and flows through from the underlying fund. These implicit levels of commission have little correlation to the “value” you create for your customer – and adviser charging has to be based on value in the eyes of the customer. And, even if your customer actually agreed with the embedded trail commission level, it seems to limit your wider remuneration options somewhat. It’s a bit like Henry Ford’s infamous statement – “you can have any colour, as long as it’s black”.

I believe it’s important to have a wide range of adviser charging options – remuneration options that are flexible, transparent and agreed with the customer. I believe that this will speed the adoption of Wrap.

Business model uncertainty and risk

There is a second area of risk for fund supermarkets. The current rebates that fund supermarkets receive and retain from fund groups could be at risk as the drive for transparency gathers pace as 2012 approaches.

Should the FSA decide to consider or review these payments in its Thematic Review, this would have wide-ranging implication for the fund supermarket model – and I believe it should. After all, as an adviser, your remuneration is transparent – and so should ours be too. I believe that advisers will demand “unbundled’ charges and, in such an environment, customers will be able to recognise value – and vote with their feet if necessary.

Advice process

The FSA has stated that it is broadly happy for an adviser to adopt either one or more than one platform – providing customer needs are met now and in the future.

The third challenge for fund supermarkets is that many customers want assets that are simply not available on fund supermarkets because they rely on retained rebates as a primary source of income. Assets such as cash, institutional share classes, exchange traded funds, or equities rarely provide a “fat” rebate and, as such, are inconsistent with the fund supermarket model – and they cannot offer them and remain commercially viable.

Wraps, on the other hand, pass all rebates (if any) to the customer and do not rely on such income sources. As a result, the range of assets available on a Wrap tends to be much wider – with the potential to meet a wider range of customer needs now and in the future. This is why I believe that advisers will need to review their existing fund supermarket relationships.

In summary, the Retail Distribution Review and FSA Thematic Review of Platforms are likely to have profound implications for advisers, providers and fund management groups. I believe that advisers will do what they’re good at – putting their customer first – and that’s why I believe that advisers will want to critically examine whether their relationships are appropriate for the future.