The last couple of years in the platform world have been just as interesting. All platforms and users of platforms are trying to negotiate a route through an environment that is changing almost by the day. We all take responsibility for our chosen route and there is more than a nagging doubt that there will be pain for some. This article looks at the key issues affecting us all.
Spring was in the air
Late spring saw the FCA issue their Policy Statement PS13/1, with the snappy little title ‘Payments to platform service providers and cash rebates from providers to consumers’. Since then plots and sub-plots have developed all over the place, with adviser and D2C platforms announcing (and sometimes re-announcing) their pricing intentions in the world of ‘clean’ share classes.
The headlines from the Policy Statement:
The Policy Statement followed an announcement by HMRC that confirmed the taxation position on cash and unit rebates, making them significantly less popular for some wrappers. The FCA also indicated that unit rebates paid net of tax could be deemed as a poor customer outcome when compared to the clean charging alternative. Like gazing down a tricky little red run laden with moguls, you could say that around this time the fun began in earnest.
A changing landscape
The RDR has presented all parts of the financial services industry with challenges, and platforms have not been exempt. Recent months have seen many platforms show their hand as charging models have had to be adjusted to reflect the move to a rebate-free world.
There have been, and will continue to be, areas of the industry where we see a wholesale withdrawal of services, and this may present opportunities for some. With many banks having pulled out of the mass market advice space, and only a limited appetite from many to advise mass market clients under an adviser charging model, who is going to fill the vacuum? The answer in some cases will be those execution-only platforms that are capable of offering good quality information to mass market clients within a reasonable platform charge. It is not by accident that guided architecture investment solutions have been on the increase across many of the execution-only platforms.
The recent bristolian pricing announcement has shown that there are a number of platforms in the D2C world prepared to do battle for the hearts and minds of savers in this area. It was also interesting to note that many journalists were prepared to look beyond the spin and get to the bottom of the numbers to see how the pricing landscape is changing. It’s a new world of platform custody charges that range from 20-45 basis points (bps). Structuring them as a charge for custody avoids VAT implications. In addition, you will see transaction charges for events such as dealing, taking income and transfers-out.
It is understandable that many in the advised space see all of this as a huge risk to how they earn their living, but it is impossible to ignore that this market is evolving, and a variety of circumstances mean that some savers may well favour this route. There will also be a group of savers who will pick and choose how they interact with the execution-only and adviser market, depending on the nature of the services and advice they need. I am a good example of someone who is hands-on with many of his own investment decisions, but will seek and pay for advice for tax planning and protection.
Despite all of the change and potential turmoil, the adviser space will continue to be a healthy place to be. We continue to invest large sums of retained profit to enhance our own Sippcentre platform. We do this for good reason; there are many advisers who have adapted their proposition for this new world. It remains a hugely competitive growth environment, with platforms fighting hard to position their proposition. Changes to price, investment ranges and tools all generally improve the position for both advisers and their clients.
A hint of frustration
The FCA has said many times that one of the outcomes they expect from all of this change is lower fund management costs for consumers. There are typically three ways that the platform industry can help the FCA to deliver this. Superclean share classes, unit rebates and low-value cash rebates. Many smaller platforms do not have the scale to gain access to superclean share classes; into the bargain, many of the fund groups are keeping a tight line on their share class negotiations. It seems many have spent the summer practising their poker faces. Many platforms will choose not to develop a unit rebate solution. Beyond this, the £1 per month per fund exemption on cash rebates is too low to be of practical benefit.
At our recent Investment Conference an interesting question was put to the FCA by one of the advisers who attended. If allowing cash rebates to continue was the key to helping drive fund management charges lower, would the FCA countenance a reprieve allowing cash rebates of up to say 10 or 15 bps to be paid by platforms to customers? I don’t think for a second that the FCA will change direction on this but I sat thinking what a great question from an adviser who obviously has a good grasp of what is going on. Many of my colleagues at other platforms may well disagree with this; some will argue that unit rebates remain a viable solution. Only time will tell, but my own view is that it is not an approach favoured by the majority of advisers, and it will lead to confusion for many investors.
A year or so ago much of the platform market seemed to be working on the basis that the pre-RDR retail price of 150 bps for a fund would very neatly settle into a post-RDR pricing breakdown of 75 bps to the fund manager, 50 bps to the adviser and 25 bps to the platform.
With the super clean announcements on the increase, we are getting the first indications of how much pressure has been exerted on the 75 bps retained by fund managers. It is inevitable that we will continue to see some movement in the pricing of funds offered via the platforms that can offer fund groups some form of ‘distribution’. However, cutting to the chase on all of this, you must put aside the rights and wrongs of whether fund groups should or should not cave in to the ‘distribution’ arguments and get to the meat of what terms are available and on what funds. My own take is that some will offer improved terms but you will find that many of the fund groups play hard ball on some of the more popular funds. Where improved terms are on offer, it will be a handful of bps either way. What really matters is the total cost of ownership. Many will be asking the question, will I be influenced by the ability to save myself 10 bps on a fund if the platform charge is 15-25 bps more expensive?
Let’s not forget the importance of service
Having set out a number of possible outcomes when it comes to the changing landscape, the opportunities presented by change, and the extent of the squeeze on charging levels, let’s come back to what many advisers actually use a platform for – efficient execution, administration, management and reporting of investments.
In all the hot air blasted back and forth about the sustainability of one type of platform model over another, it is amazing how infrequently the most important stuff - the service provided for the benefit of the platform user - is mentioned.
Clearly, the underlying cost of investment on a platform, and whether some platforms will thrive or wither as they change their charging structures, is a cause of some interest. However, I suspect this is of more interest to the platforms themselves and those who earn their living commenting on platforms, than it is to advisers and their clients.
Pulling all of the challenges together, there’s an interesting conundrum at play here. It’s entirely understandable that advisers want great service, a comprehensive investment range, strong functionality and tools, all packaged together at a competitive price. Overlay this with the fact that most also want to deal with platforms that are financially strong, and you have a complex set of dynamics that are often diametrically opposed. The winners will be platforms that manage this conundrum and deliver across all of the areas listed. For some it will be a relatively smooth run, as they skilfully avoid the moguls. For others there will be tumbles and possibly the odd bruise. If it is anything like my weekend following my son to the bottom, many during 2014 will be left with the feeling that it will be a year of fighting the mountain.
Billy Mackay
Marketing Director
AJ Bell