Wrap accounts: They're here, but who needs them?
The first article in this series addressed some the differences between wrap accounts and master trusts. This article asks who actually wants a wrap account?
Wednesday, April 14th 1999, 12:00AM
The first speaker at a conference on wrap accounts in Sydney recently certainly caught the attention of his audience when he told them the latest in administration systems - wrap accounts - aren't necessarily what investors want.
Paul Resnik of the Resnik Consulting Group told the AIC-organised conference that advisers and fund managers may be blinded by technology and developing, in wrap accounts, something that was unnecessary.
"The romance of wrap accounts have blinded a small number of providers and potential users into believing that wrap accounts are the ultimate 10," he says.
His keynote address was akin to New Zealanders telling the All Blacks they can't play rugby.
For all the criticism though, Resnik, in questioning whether advisers and fund managers have asked what their clients, the ultimate investors really want raises a valid point which applies to more than just wrap accounts.
The financial services industry has over recent years been guilty of massive product proliferation, and it has a knack of developing many products and services that investors aren't interested in.
Resnik asks whether wrap accounts are just an extension of this behaviour? (The magnitude of that question is amplified in Australia were people are rushing to develop and implement wrap accounts as they aren't - yet - heavily regulated like master trusts).
Research by his sister firm, ProQuest, shows that 70 per cent of the population fall within the categories of low to average risk tolerance.
"They are not interested in complex strategies to minimise tax because they are afraid of the consequences. In fact, all they really want is to make some money and avoid unnecessary financial shocks."
He says these types of clients don't need online share trading facilities, nor do they need the flexibility to move in and out of funds which some of these administration systems offer. In fact it could be argued such facilities work against trying to establish good long-term savings discipline.
"There is no real demand" for wrap accounts, he says, they are being driven by what he calls "supplier push".
In his view financial planning is coming out of being a cottage industry stage and developing into a business, and the focus for advisers should be on the needs of clients, consequently their efforts should be aimed at integrating the sales and service cultures.
"The winners will be the ones who integrate a sales and service culture." On that basis he ranks the IPAC Australia service as the best as it is the simplest product and it integrates these functions.
Having a seamless integration of product acquisition, custody valuation, reporting and devolution is an excellent objective, however it doesn't satisfy client needs, nor does it save them money, he says. On top of that it doesn't fit suppliers best practices and wrap accounts are complicated to run and costly and time-consuming to establish.
Resnik says there are two key questions people thinking about establishing wrap accounts should ask, namely:
Are you creating a wrap account for the right reasons?
And, are you buying the sleek, Italian sports care for its good looks and throaty muffler sound? Or should you be acquiring a humble Hyundai that actually suits your family's needs?
Philip Macalister attended the AIC-organised Wrap Account conference in Sydney with the assistance of Ausmaq New Zealand.
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