Since their introduction into the UK from the US in 1999, fund supermarkets have offered a ‘one-stop shop’ for investors wanting to choose among a wide range of investment funds from a large number of different fund management companies,
all of whom were falling over themselves to offer discounts on the initial charge.

Putting all your funds in one place has another advantage: it is easier to monitor performance. Traditionally, you can expect to get a statement from your investment company twice a year. Buy funds through a supermarket and you can monitor them every day.

Unnecessarily complicated
But just as most investors became accustomed to fund supermarkets, the investment industry started to bandy about words like ‘platform’ and ‘wrap’, confusing many. So how do these entities differ from a fund supermarket?

‘The distinctions are not clear-cut, which is possibly what confuses private investors,’ says Ben Lundie, head of development for Hargreaves Lansdown’s Vantage investment supermarket. ‘Fund supermarkets can be called platforms and, on them, investors can access wrappers such as ISAs and SIPPs. I always say that a fund supermarket is offered to investors directly, but platforms and wraps are terms used by IFAs and intermediaries and refer to the way they manage investments on behalf of clients.’

In fact, no less a body than the Financial Services Authority (FSA) has said that platforms are ‘online services used by intermediaries (and sometimes consumers directly) to view and manage their investment portfolios’.

Adnitor, a specialist strategic consultancy that advises clients on the delivery of wrap solutions, says the key differences between a fund supermarket and a wrap platform are asset coverage – all assets are eligible on the wrap platforms while only funds are available via the fund supermarkets – and transparency of charges.

On the wrap platforms, charges should be transparent through the unbundling of administration, investment and advice. On the fund supermarket, the charging structure is clouded by the packaged pricing of products, inclusive of advice.

Limited access
So will platforms and wraps follow fund supermarkets into the investment mainstream, to be accessed direct by ordinary private investors rather than under the auspices of an IFA? Shaun Sandiford, director at James Hay, the largest provider of SIPPs and the company that developed the first wrap service to be approved by the FSA, thinks not.

‘Quite simply, I think the UK regulators are far too sensible to let that happen. The whole point of a wrap account is the amount of choice it lays before you, much of which shouldn’t be approached without advice. True, you can get access to most of the investment products outside a wrap without advice, but the beauty of the wrap is they’re all in one place and the charging structure is transparent.’

Although he agrees that the terms ‘fund supermarket’, ‘platform’ and ‘wrap’ sound interchangeable, he suggests a unique way of differentiating them: ‘Consider that a fund supermarket is a bit like the TV at home in your bedroom – small, analogue and with only the five terrestrial channels. A fund platform is like a first-generation widescreen TV, with the huge back-end and a Freeview box – a definite step-up in terms of choice and the way you view the programmes. A wrap is like a huge plasma screen, with a Blu-Ray DVD player and a Sky Plus box – the sort of proposition that, once you get used to it, you wonder how you ever did without.’

Wrappers and wraps
However, it’s also worth clarifying the difference between ‘wrappers’ and ‘a wrap’. Wrappers are ISAs, SIPPs and offshore bonds that keep the investment in a tax-exempt environment. A wrap is the all-encompassing bag into which all the other wrappers are placed.

On the whole fund supermarket, platform and wrap debate, Hugo Thorman, executive managing director at Ascentric – a new, independent asset consolidation service for IFAs that offers a full wrap platform – says it’s important to consider three things.

‘As an investor, you should concentrate on the range of assets available, the range of product wrappers and the remuneration of the platform and adviser, and the transparency of that remuneration. On the available range of assets, a fund supermarket is just that – unit trusts and OEICs, but no direct equities, investment trusts, ETFs, offshore bonds or cash. A wrap platform offers all these, so the investor has more choice.’

Thorman says a fund supermarket offers a default ‘general investment account’ (GIA), which is exposed to the UK tax regime, but will also offer an ISA wrapper. ‘But, in general, they don’t offer SIPPs, offshore bonds and other various tax benefits a wrap offers. And when it comes to remuneration, a standard fund supermarket keeps a rebate of the annual management charge from the fund manager, which is how it makes its money. The client will pay the annual management charge (AMC) but won’t see how much of that is rebated back to the fund supermarket, so the remuneration is not transparent.’

Understanding the costs
Apart from the choice of investments and wrappers available on a wrap platform, most advocates of the wrap approach say that the transparency of charging is one of the key advantages. Ben Lundie says, ‘What investors need to be aware of is how charges and fees will work if they move on to a wrap platform. They need to be sure the IFA is putting them on the platform because it is good for the client, not just good for the IFA.

How everybody is remunerated is one of the key differences between a fund supermarket and a wrap platform. On a fund supermarket, the IFA is paid by the fund provider from the commission built into the annual management charge (AMC) of the fund. A wrap is used by financial practitioners such as IFAs who charge a fee for their service, and any commission built into the AMC of the funds is rebated to the investor.’

Ascentric’s Hugo Thorman explains that ‘On a wrap platform, there are generally four main parties who will require fees: the investment manager, the wrap service provider, the provider of wrappers such as a SIPP, and the adviser. The client will know what each will cost before signing up, so it’s transparent.’

As an example, Thorman says Ascentric negotiates from the fund management company a price without the initial charge (typically five per cent), the client is charged £12.50 per transaction regardless of the size of the sum invested, and any commission received from the fund management company is rebated to the client’s account. ‘Ascentric then charges the client 0.25 per cent a year, and the client and their IFA agree on the charges for the advice separately from the charges for administering the investments and wrappers.’

Conversely, Hargreaves Lansdown claims its Vantage investment supermarket offers all the flexibility of a wrap, in that investors can access unit trusts, OEICs, direct equities, ETFs, cash, gilts, bonds (corporate and government) and investment
trusts without reference to an IFA.

Direct access
Also marketed direct to investors without the need to access it via an IFA is Fidelity’s FundsNetwork, which has the slight advantage of offering access to offshore bonds. There is also a growing tendency for some higher-end advisers and stockbrokers to do ‘white label’ deals for these services, so that the private investor can effectively use Vantage, FundsNetwork, Cofunds and other platform providers, even though they are technically the client of an intermediary.

But, if the concept of a wrap platform appeals and you’re comfortable taking investment advice, and also with the fees, is there a cut-off point of capital below which it’s uneconomical to have a sophisticated wrap account? James Hay’s Shaun Sandiford feels that anyone with less than £130,000 of investments should think twice before going to an IFA and asking for a full-blown wrap service.

‘We have a minimum charge of £150 a year, which is 0.25 per cent of £60,000,’ says Ascentric’s Hugo Thorman. ‘If you only had £25,000 invested, that £150 charge would be the equivalent of 0.75 per cent of your investment, three times more. It’s obviously the client’s choice, but it becomes a less attractive proposition the less capital you have.’