The big interview: Mike Howard

JW: Why do you think the UK was lagging so far behind Australia when it came to platforms?

The market in Australia was driven by the announcement in 1983 by the then treasurer Paul Keating of a new regime for retirement funds. In order for there to be a proposition for advisers there had to be a marketplace, there had to be funds available for that to happen and this new pension regime supercharged the Australian market, which in turn led to the introduction of platforms.

The UK wasn’t really ready for what platforms could offer in the 1990s, except at the very high end. We came over in 1998, originally just on a visit to see what was going on in the UK, and realised that nothing was happening.

Skandia’s multi fund already existed and was quite popular although very expensive. But Skandia at that point didn’t really seem to understand what they had. There wasn’t an effort to turn this into a holistic financial planning solution. Having been doing this in Australia for 10 years just made it more clear to us what was likely if a proposition was launched, so we did.

JW: There have been some platform closures over the past few years. Do you think the advent of RDR will mean more consolidations or more closures?

I think the reverse will happen. I think there will be more platform based offerings the other side of RDR.

I think what you’re going to see on the other side of RDR is that the restricted advice model is going to be very popular. I think that advisers, faced with a difference in responsibilities associated with keeping their licence in a restricted or whole of market environment, are going to ask what they get apart from the ability to use the word independent and that’s about it.

If on the other hand they go down the restricted advice model route they can choose their own stable of products, which they can thoroughly research, and know it will match the client’s needs and when it doesn’t and not be shy about saying that.

I think that, in that environment, you’ll get groups of advisers that operate off a standard model and they’ll go to providers of platform engines and say “here’s the kind of feature set we’d like to offer, can you support it?” They’ll say yes and away the market will go. So I think it will fragment rather than join up.

JW: Have you any comments to make about the FSA policy statement 11/09 on platforms?

Clearly the FSA now understands that platforms are part of the infrastructure and the delivery of personal financial services in the UK because, quite simply, they’re a better mousetrap

That said, there are a number of issues that the FSA seems to struggle with. An area of controversy of course is cash rebates. The FSA seems to have concluded that a rebate to a client is the equivalent of a commission payment to an adviser and therefore must be banned. I think the industry is almost united in not understanding why it is that the FSA is so obsessed with that issue and has such a controversial viewpoint on it.

But they’re the guys that make the rules and, ultimately, while you can talk to them, they make the decisions.

JW: On the same theme, what about payments to platform providers?

These payments between parties within the provider network aren’t properly disclosed, even after MIFiD came in. This required that platforms like Cofunds, Funds Network and Skandia disclose their receipts from other parties. But they were able to argue successfully that they would make that disclosure but only in relation to particular situations. So of course that completely defeats the whole basis of it.

From Transact’s viewpoint, everything that is being paid is coming out of the investor’s pocket in some way. As long as it’s clear how much is being paid and who’s getting it, and that information emerges in an easy to understand and coherent fashion, that would be fine and banning it would be unnecessary.

We have never taken payment from anybody except the client so banning it makes no difference to us. Whether it’s a coherent or necessary thing to do is another matter.

JW: have you any comments to make about the proliferation of share classes?

Once advisers get the hang of the customer agreed remuneration model they come up with very different calibrations of what they think is an appropriate charge either based on transactions or on funds under advice.

So we have advisers that take a very small X% on a transaction, y% on funds under advice and £300 a year. I don’t see how you can have a share class that will support that model. Fund managers can say they’ll have a model that strips out what was there before, but how much do they put back in and are they going to have 0.45, 0.5, 0.55, 0.6%?

The share classes thing, I think, is incapable of solving the problem properly to the extent that there are advisers who are still frightened by the idea of talking about remuneration in the same way as a wrap, where the client sees the amount coming out on a quarterly, monthly basis.

Those advisers that are still frightened about doing that will undoubtedly try to shoehorn their proposition into something that fits with the share class model to the benefit of nobody.

JW: So Transact isn’t worried about this?

Well we’re worried about it in the sense that once there are multiple charging structures for the same investment vehicle you’ve got to be very careful about segregating your buckets of them.

So if you own some 0.5 units and I own some 0.75 units and both of these are held on Transact, the administration for Transact becomes harder because we don’t just buy and sell units in Fidelity Special Situations, we’ve got to make sure the right charging units are bought and sold and so does Fidelity, and I think a potential nightmare comes out of that. I just don’t think the share classes thing works at all.

JW: What are your feelings about re-registration?

Re-registration is a manually intensive administrative process that the industry has struggled with for the past 10 years. Whilst we’re able to buy and sell units electronically, once you’ve got an owner, the process associated with swapping ownership is for historical reasons much more complex.

If you’ve ever had to try to transfer ownership of an investment yourself - when parents pass away and ownership gets transferred for example - the trustees are incredibly picky. If you fail to include a middle initial that was in the original ownership they’ll just send it back.

The industry has battled to try to get an electronic means of doing this and various obstacles have emerged, the most important of which is counterparty risk. If Fidelity gets an instruction to transfer something out of your name into Transact’s and that’s wrong, obviously that has to be rectified and if there’s any loss there has to be someone there to stand behind it.

So who is it that should be allowed to be registered for a process like this? And as the years have gone by we’ve got closer and closer to something that can be implemented but we’re not quite there yet.

JW: what about payment of advisers by unit cancellation?

Well we do do that by default, so on Transact you have a cash account and as long as you have cash in that account, whatever payments are required, to us, to advisers, or just withdrawals by you, come out of that.

If however, somebody’s cash account runs down and a fee has to be paid, we have a process to sell down units in a pre agreed fashion. To date we’ve never actually had anybody saying to us to cash half a percent of all of their units every month to top up the cash account; that’s not an efficient way of doing it for tax purposes.

JW: Why is it that some platforms pass on so little of the interest they earn on cash?

As Al Capone said, it’s easier to steal $1 off a million people than it is to steal a $1m dollars off one person. And skimming interest is one of those apparently painless ways of getting people to pay.

We have operated on the basis that an open and honest architecture, where you can see what’s happening and you know what’s being paid, is just the right thing to do. From a commercial viewpoint that causes all sorts of obstacles, because it’s much easier to sell things if charges are hidden.

Charges wouldn’t be hidden the way they are if that wasn’t true; it’s just a fact of life.

JW: Why does Transact charge an annual fee for smaller wrapper investments?

Transact charges in three different ways. It charges up to 0.2% for transactions being executed, up to 0.5% ad valorum fee before discounts and also these wrapper fees. Maintaining and operating a life company is an expensive proposition so those wrapper charges are designed to conceptually match the costs that we incur.

The maintenance of the account overall requires work and therefore there’s a charge for it - the maintenance of a life company as providers of the empty boxes, the wrappers - again it represents a desire to be open and honest and have a charging structure that matches the way that people cause us to do work.

The consequence of that is that there are costs and people would always prefer that they were less or not at all.

JW: So Funds Network and Nucleus might charge a lesser or non fixed fee and make it up somewhere else?

Indeed this is a problem that we face. From the point of view of successful commercial enterprise, being as open and straightforward as we are actually puts obstacles in our way. On the other hand, once people have realised that, we get tremendous loyalty. It’s against our ethical standpoint to cross subsidise if it’s avoidable.

JW: What happens to clients who are orphaned by advisers post RDR but are still on the platform?

Transact doesn’t offer advice but if a client is orphaned, we don’t throw them off the platform. It is up to them to find another adviser and agree remuneration.

But if they want to run their own account from our platform, that’s fine. There are all sorts of issues with offering advice and there are issues with execution only; you can’t run an execution only platform and then assume that the investor knows everything that they need to know.

We don’t want to provide the infrastructure necessary to handle execution only clients as a commercial proposition but, where it arises, where somebody has been with an adviser and for whatever reason they part company, the charges that we levy go up and this discourages anybody from coming on. After all, they could get an adviser, get on the platform and then kick him off and avoid the fees. If the client hasn’t got an adviser we have to take greater care with instructions that we receive, hence the extra charge. And post RDR I don’t really see that changing.

JW: where you think the personal finance industry might be in 10 years?

New technology is always coming out, and there are some that you know about but don’t really know where they’re going. There are those that haven’t yet been invented so of course it’s impossible to see what kind of impact they might have.

What I see happening is that all of the processes associated with both long and short term management of money will become more integrated. I think that the financial planning process itself and platforms will become much more tied together. Integration will mean that the pressure on prices to come down will continue because, as things become more integrated, cost savings emerge. At the same time the counterbalancing argument will be that, in order to move to another platform will become more complicated - not impossible but a more elaborate process.

The ability to run your life from your phone will be a fundamental part of where our industry will look to target cost savings, time savings - the more that people can do things on the go, the more available they are to be reached often, and the easier it is to get things done.

There’ll be more offerings, but probably from the same fundamental software platforms and everything will just become more tightly integrated. If you think about financial planning, it’s the equivalent of a family budget over 50 years instead of a year or month. And platforms will be able to deliver a process where that spectrum of budgeting is effectively available and I suspect that’s where everybody’s heading.

If you look back, in 2000, if you wanted a diversified portfolio you were caught in a paper war. If you had 10 different investments you were going to get something through the door roughly every day and it would often be quite difficult to interpret because the same kind of document from two different providers wouldn’t look the same.

Platforms changed the way that investors were able to understand and interact with their portfolios. At the same time they freed advisers from being commission slaves where there just wasn’t a mechanism to effectively and efficiently do what they do now.

In future years, I would like to think that wraps will be seen to have transformed financial services in much the same way as the reforms that Sir Mark Weinberg started 50 years ago when Abbey Life was launched on an unsuspecting, old fashioned and complacent life industry.