Credit Suisse shuts down wrap program

“That’s a wrap.” It sounds like an everyday statement, but those words had double meaning for the Australia division of Credit Suisse in July, when it waved the white flag above its two-year-old wrap program that failed to gain scale. This failure has some experts speculating about what this will mean for other new entrants into the wrap space.

By early August, Credit Suisse’s MasterWrap platforms had attracted only AUD$130 million ($111 million Cdn.) since its launch. It’s a bitter blow for the firm, which touted its MasterWrap platforms at being designed “with both advisors and clients in mind.”

Credit Suisse went to great lengths to set up its platform. It had hoped that it could succeed in an already mature wrap market with better technology and lower fees. The investment used technology to minimize paperwork for advisors. It also allowed them to monitor transactions in real time. The savings from this were passed on to investors by removing charges such as transaction fees.

So why will this investment cease operation in October? According to Forrester Research, it’s because the platform, which was handled by independent financial advisors, had weak distribution.

“Firms that fail to prioritize building distribution or late entrants that do not own distribution will struggle to make significant headway with advisors that have already entered into deals with other platforms,” writes Forrester’s Alyson Clarke in a recent note on Credit Suisse.

Forrester estimates the platform cost Credit Suisse about AUD$20 million ($17 million Cdn.) to set up and was going to require additional money to keep it competitive. As Clarke notes, “Credit Suisse justifiably decided not to make a further investment.”

The European wrap market could be the next one to run in to trouble. This market is labouring under some of the same delusions by focusing attention on technology and product features, while underestimating the importance of good strategy and strong distribution, writes Clarke. “European firms need to invest in advisor group acquisitions to secure the distribution necessary to drive scale.”

In Canada, the wrap market is still quite strong. A recent study by Credo Consulting found that 37% of CFPs are putting 22% of their client money into mutual fund-wrap programs. The same study predicts that wrap programs are amongst the three investment products that are likely to see the greatest increase in use in the coming years.

Still, that’s not to say all of the wrap programs available today are here to stay. “Not every wrap has been a smashing success, sales-wise,” says mutual fund analyst Dan Hallett of Dan Hallett & Associates. But if he was to look for the wrap program that might be struggling, he suggests looking for funds that have been around for a few years and have a small asset base.

A quick check with Morningstar Canada yields several examples. For instance, Standard Life Growth Portfolio A and Meritas Balanced Portfolio have attracted net assets of $18.6 million and $10 million respectively since their launch over two years ago.

Clarica’s SF CI Global Growth Portfolio and CIBC Managed Aggressive Growth Portfolio have been around even longer, but they’ve only drawn $28.5 million and $24 million each. Then there is the Co-operators Fidelity International Portfolio A, which, after almost three years on the market, has net assets of $2 million. Manulife’s Simplicity Moderate Portfolio — having had a slow start — is even larger, with $8.6 million in assets in its first year.

Some of these numbers could simply reflect the number of versions of these funds that are launched. “The more versions you have the more each one is going to be diluted in terms of asset level,” says David O’Leary, a senior analyst with Morningstar Canada. “I don’t know though that it is a lack of success with these products or just the fact that they’ve got so many versions.”

With so many options available, advisors need to do some extra work if they are going to provide value to their clients. O’Leary fears that all too often, advisors recommend wraps because they are very easy.

“You do have to do extra homework; some of them are just using this as an excuse to charge a high fee,” he says. “Overall, there are a lot of [wraps] that are fairly average performers. You are probably paying a little too much and doing a little worse than you otherwise could.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(08/21/06)