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Good news for investors in a New Year

By Dave Thrifty 

I got an email from a reader last week asking if she should use a “wrap” to hold her investments as her adviser had recommended. In the US the concept of Fund Supermarkets is very well developed and most retail investors would use these. In the UK, the concept is also quite well developed with the terms WRAPs, Platforms and Fund Supermarkets quite interchangeable.

Dealing directly with retail clients investing forty to fifty thousand pounds is quite expensive and the charges you pay to say Jupiter, Henderson and the likes reflect this. The Jupiter Merlin fund range for example charges about 2.54% per annum to invest your money. If you consider that some of the largest pension funds in the UK will also invest with Jupiter & Henderson, then you’d think they wouldn’t be investing small amounts. The British Airways Pension Scheme with £12bn in funds might want to give Jupiter £500m of this. What happened in the past is that BAPS would negotiate a fee. Later Jupiter would create a special lower cost version to market to institutional investors as it was now inexpensive for Jupiter to look after large sums of money.

Some smart person thought, what if I get a lot of individual investors together and combine all their investments in one place – I could negotiate a discount with the fund manager and keep the difference – Fund Supermarkets were born. In the Jupiter, the current fund supermarket fee is 1.79% pa. This model has been very profitable in the UK for the likes of Hargreaves Lansdown, although a change in legislation that abolished these “secret” fund rebates has made it more challenging.

The good news is that retail investors can now access low cost institutional share classes through a platform or wrap, because it’s much less expensive for a fund manager to deal with the platform as one client who in turn might have twenty thousand individual clients. You can still go directly but minimum investment is 5 million sterling.

In terms of our understanding, we know that 1) platforms or WRAPs will charge us a fee although 2) the cost of investment funds will be lower – so is there a benefit overall ? A typical platform fee seems to be in the range of 0.25%pa to 1.50%pa, so even adding in this fee it still offers a saving. There seems to be a lot of other benefits too, for example, just having everything in one place and getting one statement or valuation appeals to a lot of older investors (like myself). If you want to switch investments, you don’t have to sell one fund and wait for the money to turn up before investing – a WRAP will allow you to buy into the new fund immediately – they “pre-fund” the purchase. This reduces any ‘out of market’ risk – that is – values go up while you’re waiting on the money to turn up from selling your investment. By logging on to the platform you can keep track of your investments and move everything into cash at the click of a button instead of phoning twelve different firms.

What I like most is the ability to see what’s going on in the section of my account that’s run by my investment manager, as well as being able to research funds on the platform that I might buy for my self-managed section. What’s also particularly good is the range of funds available and the way this keeps growing. It seems that if one investment manager identifies a “good” fund, it gets added to the platform and then it’s available to all, although I’m reassured by the fact I can only access regulated funds too – no unregulated rubbish.

In different jurisdictions, these WRAPs allow access to different types of investment accounts, for example ISAs and SIPPs in the UK. This ability to have all my investments in one place as well as the cost savings and extensive fund range alongside the fact I can log on day or night, whatever the timezone means I’m a big fan of WRAPs, Platforms or Fund Supermarkets, whatever you call them!

david.thrifty@yahoo.com