Wrap accounts, initially flagged as the biggest thing to hit the financial services industry, have not taken off as quickly as predicted. But the decision by Standard Life to roll out a wrap this year gives weight to the likely success of these systems.
So what is a wrap account?
A wrap account is not an investment itself, so you can’t make money on it. It is really an online administrative system where the provider holds and sometimes manages your investments. Wraps tend to consist of three components: a wide range of tax wrappers; any eligible investments; and a web-based front-end system that gives people access to their investments. Traditionally providers offer standalone products but a wrap brings all of these together in a user-friendly format.
What can I put into a wrap?
In theory, any investments can go into a wrap, but in practice you may be restricted to those of the providers with whom the wrap provider has done a deal. You should be able to hold everything in a wrap including mutual funds, equities and tax shelters such as Isas, Peps and Sipps and personal pensions. You can select the range directly or through an intermediary.
What’s the difference between wraps and fund supermarkets?
At a very basic level fund supermarkets offer one wrapper – mutual funds, Isas or Peps. They do not offer access to pensions, onshore or offshore bonds. In some ways wraps are the next step in the evolution of fund supermarkets and Cofunds and FundsNetwork have already developed alliances with L&G and Standard Life respectively, enabling them to move closer to a full wrap proposition.
Who takes charge of my investments once they’re wrapped?
The provider of the wrap account acts as the client’s nominee and purchases the investments on the client/intermediary’s behalf. The client’s holdings are then consolidated to provide a single view of the investments. Any existing holdings can also be transferred into the account to provide a whole portfolio view.
What are the benefits?
At the moment annual statements are sent on the anniversary of the date when an investment was bought. With a wrap account the information can be updated instantly. It will make it easier to see how a portfolio of investments is allocated.
Which one should I buy?
There are very few wrap accounts on the market. Those available vary in sophistication and complexity. For example, a straightforward mutual fund wrap would offer underlying investments in unit trusts and Oeics. However, a more advanced offering, sometimes referred to as a traditional wrap, might also include direct holdings in international equities, bonds and other insurance products.
Who offers wraps?
At the moment the UK wrap market consists of big brand names such as Skandia, Fidelity FundsNetwork, Selestia, Abbey and Standard Life. Also included are less known consumer brands, including Transact, CoFunds and 7IM.
Can I get it over the phone?
Wraps are mainly sold through intermediaries, but there are some firms such as 7IM, Transact and Hargreaves Lansdown that sell direct to investors.
What are the charges?
In the US, where wraps are well established, average fees for equity-based accounts run at about 2 per cent, while the Australian market has charging levels of between 2 and 2.5 per cent. In the UK charges tend to range from 1.5 to 2 per cent of assets under management which is high compared with annual charges on unit trusts and wealth management services. One of the major benefits of a wrap is access to investment products at wholesale prices.
Ideally under a wrap you will be able to transfer at no extra cost but many platforms make you sell your initial investment and then buy it again under the new wrapper. This pushes up the cost and also means you are out of the market for some time while you wait to buy that investment again.
Can’t I just transfer my investments?
Some platforms, including Standard Life’s new offering, will allow certain investments such as mutual fund holdings and stocks and shares to be simply re-registered on to a wrap. However, insurance products such as bonds can’t legally be re-registered and therefore must be surrendered and repurchased before they can be moved on to a wrap.
Is a minimum amount of assets required?
This varies with providers. There is often the option for customers to manage their own portfolios or to allow intermediaries to manage portfolios on their behalf. Investors can usually build investment portfolios based on individual attitudes to risk, age and time horizons. Wealthier investors gain the most from these wrap accounts as many providers will lower the charges for assets under management over £1m.
If I buy into one of these systems and find a better one a month later, can I get out of a wrap account easily?
This often depends on whether the account holds products of the sponsoring institution. Moving to a new wrap provider may prove difficult and take time. Closing the wrap could incur fees such as deferred sales charges, depending on the fund holdings involved.