The platform industry has mushroomed over the last few years. There are now 25 platforms in the sector, according to Platforum - from just nine seven years ago - and assets under administration have doubled over the past six years.
In addition, the financial crisis appears to have had little effect. Since 2008, the amount of assets administered by platforms has grown to £176bn, from £63bn, dipping by £5bn during the economic problems.
It would appear that platforms are becoming more accepted. Tom Sheridan, chief executive of 7IM, said: “Platforms have become a standard way of doing business now for clients, and for investments in general. Using a platform has become the standard means of operating but not surprising we’re finding more platforms popping up.”
One of the big drivers is the motivation by life offices to set up their own platforms, prompted to protect their legacy business.
Mr Sheridan said: “They have a back book of business to protect. If they don’t have a platform then they’re liable to lose assets that they might be able to retain if they have a platform.”
He said that a life company may have sold a pension a number of years ago, and the financial adviser may want to move those assets. “If the life company doesn’t have the platform, it’s possible that the assets will move elsewhere. Advisers are more and more moving money onto platforms,” he added.
But it is not just adviser platforms that have grown. Direct-to-consumer platforms have grown in a dramatic way as well. There are now £73.2bn of assets administered on direct platforms, according to Platforum, as of the end of September last year.
This is a rise from £64.9bn under administration at the same point the previous year. Nearly a third of this market is taken up by Hargreaves Lansdown, with a 29 per cent share. But other IFA-owned brands are also doing well. Together, Hargreaves Lansdown, Bestinvest, Willis Owen and Chelsea Financial Services have cornered 37 per cent of the market.
Regulation
As the platform sector permeates, so the FSA is keeping tabs on the industry. It has already ruled on bundled charges, with most in the sector accepting the process for unbundled charges, and many saying transparency is a good thing.
It has also banned cash rebates, preferring clients to be paid back in units instead.
The question it is now looking at is the role of model portfolios. This area, where advisers can put their clients into an off-the-peg portfolio, saving on time and extra work, has grown dramatically.
Cofunds recently said that it has seen a staggering increase in assets over the past year in its model portfolios, rising from £28m at the end of 2010 to £380m at the end of 2011.
Many predict this to continue, as advisers segment their clients and look for alternative ways of offering a decent service to investors at a price they can afford.
Phil Billingham, head of business consultancy at Threesixty, said: “They work in a number of different ways. They started off as being put together by some IFAs who were looking for a more structured approach for their clients, rather than having to pick individual funds as part of their segmentation.
“When wraps and platforms came in and offered rebalancing tools, and you were in a balanced portfolio, once every six months that portfolio could be rebalanced on a low-cost basis, and it was much cheaper to do it that way.”
The FSA is looking at the way model portfolios are used by advisers. It has said that the use of such portfolios must still work for the client regardless of the status of the adviser.
In its guidance consultation Retail Distribution Review: Independent and Restricted Advice, the FSA said: “It is worthwhile reiterating that personal recommendations made through such means must be suitable and in the client’s best interests, regardless of whether the firm is providing independent or restricted advice.
“We have expressed concern about levels of suitability in a number of circumstances. For example, as we pointed out in recent guidance on suitability, we have seen evidence of firms failing to challenge cases where automatically generated investment selections (for example, from model portfolios or asset-allocation tools) are unsuitable for individual customers.”
Mr Billingham said there could be a possibility of advisers drifting into discretionary activity. “That model does have some dangers in it. One of the dangers is that firms could act as if they are discretionary managers. This should be done on an advisory permission.” The problem is that if an adviser needs to get the authorisation of a client to move into a different fund, but cannot reach the investor, then he stays out of the recommended fund, which could adversely affect the rest of the portfolio. An adviser may find it easier to take on discretionary responsibilities.
However, Mr Sheridan points out that in many cases, model portfolios work well. He said: “I believe that in many cases the structure and the process of the models is probably better than letting somebody make up their own portfolio who’s not necessarily as qualified as someone who put the portfolio together.”
As competition increases, and advisers look at trying to get a better deal from their service providers, so costs appear to be coming down. Mr Billingham said that the market was starting to mature, with greater differentiation between niche and broader platforms. He said: “We’ve seen more choice and I think we’re seeing, coupled with that, more emphasis on costs and usability.”
There is the additional factor of cash rebates, which could have an effect.
Mr Billingham said: “Wraps and platforms are still subject to a lot of change. Where we are today isn’t where we’re going to be in a year or so, and we’re going to see wraps themselves as a mechanism for reducing costs.”
However, Shaun Sandiford, business development director of Axa Wealth, claims that advisers should not simply look at costs when doing their due diligence on a platform, but what the adviser gets for their money.
He said: “People make decisions on price, but what do you get for that price?” He said, for example, that on some platforms it was not entirely clear when a trade would happen on a fund, so that it could be unpredictable how much money would appear in the client’s account. He said: “With some platforms you don’t know if you’ll get what you’re expecting. With Axa Elevate we guarantee to pre-fund the execution of that trade.”
While platforms are undergoing change, advisers are already facing dramatic change themselves, with preparations to be RDR-compliant by the start of next year.
This could be helped by platforms as well, according to Mr Sandiford. One of the challenges is how to deal with adviser charging, and incorporate regular fees into one’s business model. An adviser could use the platform for administering adviser charging. But it could be more sophisticated than that. One difficulty might be that a client would not be in a position to pay the same fee each month. Some platforms could work by being able to adjust the payments dependent on their ability to pay.
Mr Sandiford said: “We see lots of clients spending lots of time understanding a client’s attitude to risk. For me, adviser charging needs to be tailored to the client’s specific ability to pay - adviser charging that can look like a personal payment plan. There aren’t many platforms that can give you a payment plan that matches the requirements of the client.” For example, a client may be able to pay a large part of the fee in one month, and a small regular amount over the course of the following year. Some platforms are able to offer that flexibility.
As platforms gear up to making changes instigated by the regulator, so the platform sector keeps moving on. Mr Billingham said: “The next step of evolution is where IFAs says ‘I’m not an expert in managing funds.’ They’re outsourcing to ABC Wealth Management and their portfolios are available on the platforms. From the advisers’ point of view they’re getting advice from the IFA but the management of the portfolio is being done by the discretionary manager on the platform, and the platform has made that possible.”
However, he said, not all discretionary managers are available on all platforms at the same price.
Still, for a sector that has seen the number of players more than triple in seven years, that is likely to be a challenge that it will meet.
Melanie Tringham is features editor of Financial Adviser
