Advisers warm to wrapping up investments

A 'new model' of financial advice puts customers first, rather than the needs of commission-paying pension and life companies. Simon Evans reports

Facing a wall of cash put up by the big boys to ensure the status quo, David Ferguson is either bonkers or knows something the rest of us don't. As a qualified actuary and chief executive of Nucleus, an Edinburgh-based provider of services to the financial adviser community, Ferguson knows the odds aren't stacked in his favour. But he remains undeterred.

Created out of just £5m worth of seed capital from a South African bank, Sanlam, Nucleus is pitting its wits against the collective might of some of the UK's biggest insurance firms such as Aviva and Standard Life.

Ferguson plies his trade in the burgeoning wrap market. Wraps allow financial advisers to combine or "wrap" their clients' investments into a single online account. Although it might not sound like a reinvention of the wheel, the advent of wrap is revolutionising the way traditionally conservative advisers conduct their business.

Wrap enables IFAs to switch their clients' money out of underperforming assets into potential money-makers. In the past, many IFAs just stuck with traditional providers and their often woeful products because it was simply too difficult to switch. The advent of wrap should mean that customers get a better deal from their advisers who are now able to shop around on their behalf.

"I was working for Scottish Life International back in 1998 and I realised that the distribution of products between traditional life and pensions providers and the IFA community was wholly unbalanced. Things simply didn't function," says Ferguson.

While on holiday in California, Ferguson – who was voted one of the top 100 rising stars "with the potential to shake up the UK's retail fund management market" in the Financial News last year – hatched a plan to create an independent wrap platform to take on the big boys. "IFAs had become the sales force for the life and pensions industry which was and is clearly wrong," he says. "We wanted to create an independent platform that would allow advisers to move away from their reliance on life and pensions firms."

Usually, IFAs receive hefty commissions from life and fund management companies to sell products to customers, so the incentive to rock the boat wasn't there. But as life and pension funds have struggled, commission payments have been cut, creating a more progressive band of IFAs adhering what has been described as "a new model". These advisers are remunerated by the client rather than by commission, paying fund managers and life firms.

"Not that long ago, there were about 200 life companies operating in the UK," says Paul Bradshaw, the non-executive chairman at Nucleus. "Now there are about 10 meaningful names left. The economics of running life businesses often just don't add up. Paying 8 per cent commissions to advisers selling your wares just isn't viable any more. Life companies have issues about capital, so paying out hundreds of millions in commission just won't continue. I remember when Scottish Amicable had its own garage to service cars, for goodness sake."

Not surprisingly, Nucleus hasn't had its own way in its fight with the big life and pensions players, which have blown hundreds of millions on their own offerings to keep IFAs in tow. Various reports estimate that Aviva has ploughed hundreds of millions into its offerings in the past, while Standard Life has similarly thought to have committed more than £100m to its wrap.

"The life and pensions companies have come out fighting as you'd expect," says Bradshaw, who joined Nucleus after heading Abbey's insurance and asset management business. "In many instances, they have played dirty on things but in particular on the transfer of business from their own platforms to Nucleus. But the FSA is on our side with this and the tactics from the bigger players will have to stop."

Nucleus hired lawyers last year to look at the antics of the bigger players, a process that is continuing, while Ferguson is shocked at the way the use of golden handshakes, offered by life companies to attract new business to their platforms, is continuing. One company offered a large IFA network £250,000 to shift its assets, he says.

"The behaviour of some of these companies is outrageous and unfair," says Ferguson. "We have lost out on some clients moving to us because the transfer process has taken so long."

So far, Ferguson and Bradshaw have attracted more than 60 IFA firms to their platform and assets worth about £600m. Advisers pay £15,000 each to join Nucleus but receive an equity stake in the business, which allows them to enjoy profits in the future as well as playing a role in shaping the Nucleus offering.

"Look, we don't want to work with all the IFA market," says Ferguson, who estimates that out of 30,000 advisers in the British market, only about 5,000 are "credible". "The IFA world has traditionally been backward but increasingly some firms are embracing professionalism. It's these customers we are targeting."

Despite the difficult market conditions, Ferguson has turned away a number of advisers looking to join the platform because they didn't fit the bill. "It's important we don't dilute the proposition so, yes, we have said to some advisers recently they might be better off going elsewhere," he says.

"The industry is changing far more rapidly than many people think," he says. "The old days of commission-hungry advisers selling products to the public have gone. Those advisers who think that they can simply plough old furrows and well-worn paths are finding out the hard way that they need to change."

If the early dents Ferguson and his team have made in the creaking life-and-pensions arena are anything to go by, the wall put up by the big players to keep the status quo in tact is set to come tumbling down soon.