28 Aug 2018 Deconstructing the FCA’s Platform Study Interim Report
The FCA’s interim platform report has already been well and truly thrashed out by trade journals and other research houses. However, we believe that our tools and research are ideal for proactively engaging with the regulator’s long-term objectives and have reviewed the interim report on that basis. But first let’s start with the basics: why, who and what.
Why did the FCA conduct the platform study? Because fund managers pointed fingers at platforms. The Asset Management Market Study (AMMS) had thrown up a number of concerns, but fund managers deflected some of the criticisms by blaming platforms. The regulator had no choice but to conduct a wide-reaching review of the platform industry.
Ultimately, the consumer drives the regulator’s thinking, which is why it considered both DIY and adviser platforms in the same study. Whether they are advised or self-directed, the consumer always pays for the platform service and so it is only right to consider how they access the whole range of platform services in the market. In addition, some providers have several propositions which will be underpinned by common DNA and functionality.
The regulator summarised its key concerns as follows:
- Switching between platforms can be difficult
- Shopping around can be difficult
- The risks and unexpected returns of model portfolios with similar risk labels are unclear
- Consumers may be missing out by holding out on too much cash
- Orphan clients who were previously advised but no longer have any relationship with a financial adviser face higher charges and lower service.
Shopping around can be difficult
Culturally, we’ve been brought up with the idea that financial services providers do things for free. For example, banks don’t charge if your current account is in the black. In addition, you can arrange your car, house and life insurance on comparison sites and while users know they pay for the cover, most would be astounded to learn that some of their money is going to the website.
The same was true of advice and that’s how most of the industry liked it — clients utterly clueless about the fees they were paying and assuming that advice was ‘free’. RDR has been with us for five years now, but most adults still don’t know about it because less than 10% of UK adults actually seek advice. A large majority doesn’t save or invest, and if they do, they stick with savings accounts. Finally, when people do look for help, they’re often bombarded with jargon that makes them feel ignorant and stupid, and so they give up for fear of getting things wrong.
Even among people who invest, the level of ignorance can be breath-taking. Many don’t realise that there are costs involved in managing their investments (I’ve seen people get upset when they realise the manager takes a percentage in exchange for his work). But that’s the fault of the prevailing culture and it will be a long time before it’s accepted that financial services must be paid for. However, It would help if we explained things in a way that is easier to understand. Soft skills need to play a bigger role – we need to get rid of all the legalese and write it in language that is balanced and easy to understand. Preferably by people who are not from the industry.
While investors can get their heads round the idea of paying someone to manage their money, explaining what a platform does can be difficult. But as these charges can have a considerable impact on overall returns, it’s important for consumers to understand how they work. As some platform pundits have pointed out, it’s virtually impossible to do these comparisons on a spreadsheet as there are far too many variables to provide an accurate picture of individual costs. Some research houses provide static heatmaps, but these can only give you a broad idea of the level of costs, and if you happen to trade heavily or hold lots of exchange-traded products they can be dangerously misleading.
Frustrated at the inability to compare costs accurately and sure that other people would be in the same boat, we created a snazzy little online calculator that allows investors and advisers to compare platform costs quickly and efficiently: comparetheplatform.com. So despite what some platform pundits have asserted (so much for objectivity) there is a free, online tool that can help advisers and investors calculate the cost of platforms and compare apples with apples.
Does price matter? Yes platform pricing can make all the difference. Take this scenario: £50k in ISAs of which £25k is in funds and £25k in exchange-traded products (ETPs). Not only that, our D2C investor plans to trade about £5k five times a year in both funds and ETPs. In this scenario, the cheapest platform is Vanguard at £75 per year. However, the investor will only have access to Vanguard funds and ETFs so although competitively priced, it may not suit his purposes. IWeb is the next cheapest at £125 per year. The platform is run by the Halifax Sharedealing service; it’s clunky and difficult to navigate and there’s little in the way of support, but it’s dirt cheap. At the other end of the scale, Alliance Trust is the most expensive and would cost him £320 per year (but may well be just as clunky).
The point is that like our shopping preferences, consumers may still choose to use a more expensive provider because of the service and tools they get, it’s about overall value and not cost. I’m constantly surprised at the number of people who use and are fiercely loyal to St James’s Place. (Ironically, St James’s Place is moving next door to Transact — I have visions of Transact staff staging interventions and rescuing unsuspecting investors from their expensive fate). To check our findings or to run other D2C or adviser platform comparisons for free, visit: comparetheplatform.com
Don’t forget the investments…
The missing piece of the pricing puzzle is the price of investments on platform. A platform may be more expensive with a rich array of services and tools, but if it’s negotiated better prices from fund groups, then the overall price could be lower for the investor. How platforms negotiate pricing is obviously a bugbear for the regulator. But the truth is an independent platform that has no influence over its advisers, will struggle to negotiate because he can’t give the fund manager what he craves: a ‘give me the money and I’ll give you lower fees’ scenario.
Fund prices are confidential for a reason. Fund groups do not want other large distributors to know that they may not have as good a price as other distributors — imagine you’re ABC fund manager and you sell funds all over Europe. You agree to give Hargreaves Lansdown a lower price on the basis that you’ll be included in the 150+ list, but on your next trip to Switzerland, your large Swiss private bank client who generates similar volumes (if not more) demands the same deal or lower.
It’s a slippery road that fund groups have desperately tried to avoid until now… but it’s time everyone woke up and smelt the coffee. It’s coming, whether platforms and fund groups like it or not, and both would do well to start working towards a solution that is beneficial to all.
To this end, we’re launching a project to provide comprehensive platform AND fund pricing through comparetheplatform.com. It entails platforms providing feeds of their individual fund prices which would, if the adviser or investor knows what the portfolio components are, provide a complete view of the overall cost to the investor. It would also help us work an average fund cost for a platform and across standard sets of funds.
We would encourage platforms to pre-empt the regulator’s actions in this area by working with us to provide comprehensive pricing in a fair, balanced and accurate way for all platforms and fund groups. If you’d like to know more and/or would like to be part of the working group, please get in touch.
Switching platforms can be difficult
The regulator already has skin in the game here. It made it possible for consumers to switch bank accounts by successfully imposing minimum standards and maximum timescales. It obviously wants to liven up and liberate the platform industry with a similar approach to ensure that investors are not prevented from switching simply because of hefty fees and the fear that it will take months to achieve.
It has raised the possibility of banning exit fees, particularly for D2C consumers. But the transfer of complicated portfolios can be costly to administer and banning exit fees will simply encourage the platform to charge the fees elsewhere. It’s best to keep it simple and stupid – allow platforms to charge exit charges, but cap them and set a maximum time period for the switch with penalties for any delays. For every week of delay, the conceding platform should, for example, forfeit a percentage of fees with a complete loss of the exit fee once it has gone over the allotted transfer window.
Cash is definitely not king
The FCA points out that around 8% of D2C investments are in cash. The problem is that D2C platforms are too scared they’ll stray into advice by telling people they have too much in cash. But again, there has to be a more sensible way of nudging people without it being considered advice. Videos, guides, quizzes and more can give people a better view of asset allocation. Send them to Comparetheplatform.com where there are plenty of guides and videos to educate investors.
This might seem innocuous enough, but it was a shot across the bows for platforms. That’s because platforms profit from the difference in the interest they receive on the cash and the interest they pay to investors and are therefore disincentivised to give investors a helpful nudge in the right direction.
The regulator estimates there are just over 400,000 orphan clients with more than £10bn of assets on platforms. It’s concerned that orphan clients have limited ability to access and change their investments on adviser platforms, which means they are paying for functionality they can’t use (to be fair most advised customers are also paying for tools they can’t use).
The problem here is that most adviser platforms are programmed to think of the adviser and give little thought to orphans. But a clear procedure, and dare I say it, some investment in a basic front-end or app would be a really good start. It would also justify any additional costs platforms charge for administering orphan assets. Since the interim report was published, a number of platforms have already announced that they’re looking at ways to better service this investor cohort.
The risks and unexpected returns of model portfolios with similar risk labels are unclear
We’ve been banging on about this for some time. We began the Gatekeepers study and the Great British Wealth Off (GBWO) precisely to highlight inconsistencies in how funds and model portfolios are labelled, risk-rated, and classified and monitored. While funds are more easily compared, model portfolios are opaque and some providers are reluctant to open up their portfolios to greater scrutiny.
And it’s not just about labelling. As the Great British Wealth Off has highlighted, the SRRI (Synthetic Risk and Reward Indicator) can change over an investment’s lifetime. This is not something that consumers would be expected to know or even understand, so it’s misleading for consumers. In addition, while funds are subject to regulatory scrutiny, any Tom, Dick or Harry can create a model portfolio. Consumers and even advisers assume that third-party models have been put together with care and due diligence, but our Gatekeepers findings suggest that that is often not the case.
Labels like Cautious, Conservative or Defensive are being applied to very different asset allocations and it is almost certain that the FCA will seek to introduce some range-bound definitions that will make comparison between portfolios easier. In effect, the risk and performance disclosure obligations for funds are likely to be brought to bear onto model portfolios, potentially requiring firms to use standard terminology to describe their strategy and asset allocation.
Does any of this matter? Yes. The chart below plots how much of the platform industry’s net flows are under some kind of influence, whether it’s funds of funds, preferential fund deals/sub-advised funds or model portfolios. In general, these products and solutions control between 50% and 70% of platform activity and in more adverse markets, it can be higher. It’s therefore critical that advisers and consumers can make apple and apple comparisons.
Our forthcoming Gatekeepers 2018 report will be published in Q318. Before the last report was published, our conversations with the regulator made it clear that there were concerns regarding the total cost and performance of model portfolios versus their multi-asset fund counterparts, along with the wide variations in asset mix between similarly risk-rated model portfolios. As a result, our Gatekeepers 2018 report will focus on DFMs and model portfolios and aims to shed light on whether these portfolios provide positive returns over and above the cost of running the portfolios. To find out more about the Gatekeepers study, visit: https://fundscape.co.uk/service/gatekeepers/
You can also use our handy little tool to see which gatekeepers we have in our lists and which funds they’re using. It’s online, it’s dynamic and best of all it’s free: https://gatekeepers.fundscape.co.uk/
That’s all for now. If we can help with any of the above, please get in touch.