As I sat in my office at home thinking about getting the brain in gear for the New Year, a massive tree in our garden succumbed to the wind falling just short of my house. The pessimist in me could not fail to be affected by the mess and the nagging doubt of how to get rid of one hundred years of wood. The optimist responded with a huge sense of relief that it missed my house and a suggestion that it might be time to buy a log burner!
As we move into 2012 we can be sure that the issues surrounding RDR and the necessary changes to platforms will push the optimists and pessimists into overdrive. All the indications are pointing to another platform paper from the FSA before the end of this quarter. A number of questions will be occupying the minds of the great and the good at the various platforms:
With so many questions and little regulatory guidance it is easy to find yourself in the pessimists’ camp. However, I will fight the urge and look at a few of the key issues with my optimistic hat firmly on. I should also point out that it goes without saying that the business models of the various platforms and how they will deal with the above challenges vary significantly and it’s beyond the scope of this article to go into the nuances of each.
Cash rebates/unit credits
This has become one of the central points of debate and an area where views vary. My friends from the south coast want unit credits, many of the other platforms are standing against this and favouring either cash rebates or net funds where there is no rebate i.e. a 75 bps class of fund. For what it is worth, leaving all the spin and arguments to one side, I don’t believe that investors will favour unit credits. I can’t help but feel that this is one area where simple will be best and unit deductions and multiple share classes will be anything but simple. From talking to a number of people across platforms and fund groups I get the feeling that the majority of views expressed to the FSA during their research work will have gone against unit credits. It will be interesting to see if this is the case when the research is announced and what call they make on the back of it.
Will platforms use the necessary development commitment and time as an opportunity to re-shape parts of their pricing strategy and proposition?
In a world where some are more profitable than others and some have greater access to capital than others you will see a variety of approaches adopted. It is most likely that some will adopt a steady as you go approach but you can expect one or two platforms to raise the heat on price. Some of the more established platforms seem keen to move their target audience from the mass affluent area to more of a high net worth group.
When looking at pricing and charges, I think it is possible to look at the platform market in a rather overly simplistic way. This will leave me wide open to challenge which is always part of the fun.
Platforms formed out of the traditional fund supermarket model have a simple bundled charging structure that is often good value, but it can be argued that their investment range needs widening, ironically to include those assets that do not work well in a fund supermarket model.
Coming at it from the viewpoint of the wrap platforms, their open architecture and transparent charging structure would appear to be the ideal model, but for the acknowledgement that price pressure is possible. Some will argue that there is a price to be paid for a value proposition that includes open architecture investment choice and a wide choice of wrappers. No matter what, I believe price pressure will increase.
2012 may well see some platforms play a little bit of chess with their pricing strategy. Anyone planning a change will be toying with the challenge of where to pitch their price and when to announce it. Many adviser firms are re-visiting their due diligence work and approaching their platforms of choice to seek clarity on post RDR plans.
Of course, having added an ISA and a Dealing Account (GIA) to our platform we are able to look beyond the pricing aspects and dynamics of SIPP. To avoid the risk of getting dragged into the game of chess mentioned above, it’s a touch early for us to comment on our post RDR plans.
Whilst things will change it may be of interest to look at the pricing landscape as it stands today, the following example has been produced using the Synaptics Comparator system for:
Reduction in yield results for platforms on the system with SIPP available.
.
Source - Synaptics Comparator system
Reduction in yield results for platforms on the system with platform pensions available.
Source - Synaptics Comparator system
Whilst on the subject of price and proposition, it gives me the opportunity to comment on recent coverage where it was suggested that “platform pensions” would reduce the need for SIPPs. As a friend and ex colleague of the people making the claim (it’s those south coasters again), now working for a SIPP provider that has launched a platform I would hope that I may be able to comment on this without fear of prejudice!
To set the scene it is worth looking at the recent developments that have helped shape the mainstream development of SIPPs.
Over recent years there has been a flurry of activity in the SIPP market. Increased popularity amongst advisers and investors has led to challenges in the shape of new entrants and an increased regulatory focus.
This has been embraced by the majority in the SIPP market and has been excellent news for SIPP adopters as it has driven continued evolution with increased use of technology by some providers. This has led to very positive changes to charging structures and the range of permitted investments available.
This would seem to sit at odds with my friends who contend that:
Before I explore some of these points it is worth pointing out that the due diligence and suitability process that advisers must follow will of course allow for all of these points. Any recommendation in favour of SIPP will not be without consideration of the investment needs and ultimate cost of the underlying solution. However, getting back to the main theme, why do SIPPs remain popular?
Over the last few years online products have developed that are both low cost and offer the vast majority of the investment flexibility available to older and more expensive full SIPPs. These are adviser led products, where the majority of money typically ends up either in unit trusts/oeics via a platform or invested by a panel discretionary investment manager. However, the range of other investments available includes external cash deposit facilities, Gilts, corporate bonds, shares, ETFs, insurance company trustee bonds and commercial property. In essence you are getting an open architecture type range of investments at a competitive price. Importantly, the client only pays for increased flexibility that they use. To answer my question, there are SIPPs that provide a huge range of investments at a price that matches that on offer from Personal Pensions and platforms (see above). Many advisers like the comfort of having this wide range available for use in the knowledge that the price also stacks up.
Also, it is worth mentioning that most SIPPs are a “platform pension”. Advisers are perfectly aware of this and, after allowing for all due diligence and suitability requirements, will continue to use them.
So pulling all of this together some things will change but some things will remain the same. It doesn’t matter whether you are an optimist or a pessimist, the following areas will continue to be central to how advisers differentiate the huge variety of propositions available:
Ever the optimist, I look forward to reading the soon to be published consultation paper. Oh, and before I forget, does anybody want to buy any logs?
Billy Mackay
Marketing Director
A J Bell