Wrap - no magic wand but a gateway to vital change (part 1)

22 February 2007

Have Wraps been over-hyped as the panacea for all IFA ills? Following the recent relaunch of its James Hay Wrap, Sales Director Stefano Del Federico explains his views in the first of two conversations with Paul Fenchurch

Paul Fenchurch (PF): In the three years or so since Wraps appeared in the UK, we've seen frequent references to a 'Wrap revolution', which we are told, or so it seems, at least, will transform the business of every IFA who uses Wraps into a fee-generating money pot. Is that how you see it, because although Wrap has made tremendous progress, it is clear that not all IFAs are yet convinced?

Stefano Del Federico (SDF): I'd put it differently by saying that Wrap is a facilitator of change, an enabler for IFAs. If an IFA wants to make the switch from a mainly commission-based, product sales-led business model to a sustainable fee-based and advice-led one, then I'd say that offering a Wrap-based service is their best chance of achieving it, and in practical terms is the only way to go. But the very way you put that question highlights to me the biggest and most prevalent misperception of Wrap, one that's evident in a great deal that is written about Wrap by those on both sides of the argument, and which we come across every day among IFAs, including some who are actually using it.

Probably because, in the past, we've thought and talked in terms of products, there is a tendency for Wrap to come across as a kind of 'superproduct' that does everything, or claims to do everything, and to be perceived in that way by many IFAs. So it's only reasonable that some of them should be sceptical of that notion, I also think it leads a lot of IFAs who adopt Wrap to go the wrong way about selling to their clients. Whereas, in fact, as I and my team constantly stress, the whole point of Wrap is that it is not a retail product at all, but a service to IFAs which enables them to offer their own unique product to clients, which quite simply is their own service menu and strategy.

PF: You're talking about advice now?

SDF: Yes, in management-speak, it enables IFAs to move to a defined, personalised, advice and client goals-led service model. Wrap is essentially a high-powered, state of the art back office operation, which gives the IFA access to resources that are equal, if not superior, to those maintained by private banks in-house. Its sole purpose is to respond immediately and accurately to demands that the IFA makes of it, whether for information or administration. Everything else is in the consultative relationship between the IFA and the client.

In Wrap, products, in the traditional sense, become redundant, except as generic, commoditised tax-vehicles, whose features are dictated solely by the regulations governing them, nothing else. So the only differentiators are advice and service, which are supplied by the IFA.

PF: Given that definition, I take your point that the perception of Wrap can easily be blurred - and I also note your insistence on 'true Wrap', which we probably need to explore at a later point. But, for the moment, I'd like to understand why you think it so important, as you obviously do, or you wouldn't be in your job, for IFAs to move to this new business model.

SDF: I think you only have to look at what is happening in the market and do the sums. If you are an IFA working on the traditional model based on product sales, then you inevitably will be mainly or, more probably, wholly dependent on commission, because, despite the efforts of personal finance writers and pundits, clients have not generally taken to the idea of paying fees when buying a product. So your earnings are based on both how much product you can sell and the rates of commission providers will pay.

Commission levels are falling, they've been under pressure for the last ten years or more and I think they will continue to fall further. At the same time, the product sales model relies on a large and/or rapidly growing client base, which in turn means a heavy servicing demand and high, and increasing administrative and marketing costs. So, as an IFA you're being squeezed from all directions. You only have to look at what happened recently with the reduction in initial commission on group personal pensions, I know many IFAs who wrote these stakeholder schemes a few years ago, and now can't afford to look after them properly because commissions have been slashed.

What this means is, that to survive and grow, you need (a) to cease being dependent on providers for income, and (b) cut your non income-generating client base. The only way to do both is to change to a business model that is fee-based and advice-led.

PF: I see the argument, but how does it work in practice? Can you give an example?

SDF: Let's say that, as an IFA, you need to generate an annual revenue of £200,000, and you decide to work closely with 100 clients. That means you need to extract an average income of £2,000 per client each year.

You have a choice. You can sell sufficient product to each client, each year, to generate £2,000 of commission, or sell double the amount to half of them, etc. Or, on the other hand, you can make the single, one-off sale of a service to each client that will produce the same level of fee income year after year. And, of course, if you do your job well then you would expect that fee income to rise as portfolios grow in value.

PF: But, as you've already said, many IFAs have tried charging fees in the past and found that clients were unwilling to pay them.

SDF: Clients don't want to pay fees for transactional business, certainly. But the attitude is completely different once you introduce a more consultative service that is non-product based and advice led. We know this because we work with IFAs who have made that leap of faith and succeeded. Of course it can't be done overnight, it must be properly phased and care be taken to ensure that there is no interruption of cash flow, which is where I think we, as providers must provide help and support in managing the transition.

PF: So, there's no way it could be called a quick fix, then?

SDF: Definitely not. Wrap to us is not a 'get rich quick' idea for IFAs any more than it is for clients, or for us. It takes time and requires a great deal of commitment from both IFA and provider. But there is no doubt as to the potential benefits to both IFAs and their clients when the transition is properly managed and Wrap is properly used. So I believe firmly that those IFAs who embrace it and make a successful transition to Wrap as their core business will be the ones that prosper, develop and survive over the longer term.

PF: Do you really think it's a survival issue, isn't that a bit strong?

SDF: No, I really see it as a longer-term survival issue - though even that timeframe could be optimistic, given the propensity for rapid change in this business. I'm not saying that businesses treading the product sales/commission path will necessarily disappear completely, though they might, but they will at best be far less independent, if at all so, and will confine themselves to the bottom end of an increasingly polarised market where they will find it hard to compete against big tied operators, such as the banks, for example.

Realistically, I don't think many IFAs, if any, will simply make an all-or-nothing choice. The overwhelming purpose of Wrap is the delivery of the best possible value to those clients whom it can benefit. So it's fair to assume that any IFA with a reasonably spread client base will need to consider Wrap for a substantial number of them, over time, simply to meet best advice obligations. Similarly, apart from those firms that are able to cherry-pick high net worth clients at the top end of the market, most IFAs who choose to make Wrap their core business will probably continue to make product sales to 'nursery clients', on either a fee or commission basis, it will be for each IFA to decide what is a viable mix for their firm and what their policy should be. The important thing is for the IFA to be in the driving seat and not simply dragged along by change.