PlatformsJul 26 2013

Wraps and platforms survey: Out with the old

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Managing investments online seems pretty run-of-the-mill these days. But it was only a couple of decades ago that everything was done by pen and paper, mailing and cheques.

The platform industry has taken great strides, but it has not escaped the retail finance scrutiny. While advisers can sit safely knowing they have jumped the RDR hurdle, platforms still face three years of legislation settling into place.

A period of great change is upon the industry. The long-awaited platform paper, published in April this year, finally set in stone the rules operators must adhere to in the future. While this brought some level of clarity, platforms can effectively set their own schedules until the absolute deadline. This will inevitably cause headaches for advisers and clients but, in the meantime, choosing the right one – or more – remains vital. In addition, advisers have to consider how platform charges will affect their business models.

Business as usual?

Table 1 outlines the platform details of all the major players in the market. The list is identical to last year, giving a strong basis for comparison in terms of customers and assets under management. Zurich was the only company not to disclose data, the same as last year, because it launched towards the end of 2012 so does not yet have a track record of figures.

Total assets under management to 1 June 2013 for the platforms that provided information reached £267bn, an increase of 25 per cent on last year’s figures. The total number of clients on platforms has also increased to 3.3m, a more modest increase of 2.6 per cent.

With the growth in assets far more significant than the number of clients, the obvious conclusion is that those who are already on a platform are putting more money onto it, getting good returns from their assets – or both. Undoubtedly many investors benefited from the stock market rally that ran up to the end of May, although some investments will have dropped since.

Looking behind the figures, almost all platforms have seen an increase in both assets under management and number of clients. Most have seen business boosted by 15 to 50 per cent, although there are some standout figures. Aviva more than doubled its assets to £1.8bn, along with a 60 per cent increase in the number of clients, which it attributed to its targeting of advisers matching the right clients to its platform.

True Potential saw its assets under management increase by 150 per cent – although moving from a relatively low base of £600m last year – and more than tripled its client base. Having launched on 21 March 2011, last year’s data reflected the first full year of operation and it is proving popular with advisers.

Access for all

With the RDR bedding in, there is a far greater focus on efficiency and cost. New ways of managing clients are developing, from a full-blown service to more of an arm’s length proposition. The platform world is evolving along with this need, providing different levels of access to advisers and clients to meet various requirements.

As shown in Table 2, the vast majority of platforms offer direct adviser access, with Vantage and WealthManager+ being the only purely direct-to-consumer services. Regarding client access, adviser-led platforms take one of three approaches: full client access where clients are able to execute trades independently; read-only access where clients are able to see valuations but unable to make any alterations; and a choice between the two, where the adviser and client can decide what level of access is appropriate.

Ascentric, Cofunds, James Hay and Raymond James provide a choice, with Vantage also able to do this for discretionary investment management clients. A total of 11 of the 20 platforms offer just read-only access for advised clients, meaning they can keep an eye on their portfolios but not execute any transactions. For Terry Huddart, technical communications manager at Nucleus, this was a conscious decision. “It is deliberate because advisers tend to want to have control over that sort of thing,” he says.

On the other hand, a number of platforms do not offer a read-only facility; clients can make transactions whenever they wish, regardless of the adviser. These are Fidelity FundsNetwork – although it says it is up to advisers how much this functionality is promoted – Skandia Investment Solutions and Transact.

Maintaining control

For some advisers, having the option to either allow clients direct access or not is an important part of the overall service. Read-only access has been the traditional approach in the platform world, but with changing needs and requirements, advisers are starting to think outside the box.

In one scenario, an adviser could manage a client’s more complex investments but the client could manage their own stocks and shares Isa. Depending on the volume of money involved this could pose a problem with asset allocation and risk management, but if a client wanted to retain control over a particular area, advisers might find it useful to be able to offer it as an option on the same platform; at least all assets would be in one place. This type of arrangement depends upon a strong relationship between client and adviser.

Another development is for advisers to offer a direct-to-consumer service on a completely non-advised basis. This has the upshot of being able to brand the service as the adviser’s own – such as the recently launched IC Direct, a white-labelled offering based on Fidelity and branded by established Surrey-based advisory firm Informed Choice – adding the potential for those non-advised customers to become advised further down the line.

This development clearly has an impact on projections for platform consolidation. For almost as long as platforms have existed, commentators have claimed that there are too many out there and a narrowing must be imminent. But, so far at least, this has not borne out.

Sarah Muir, proposition management consultant at Aviva, believes the market will remain relatively unchanged due to the barriers to entry and the difficulty of merging businesses. “It is questionable as to whether this relatively new market can sustain so many players, but the complexity of consolidation may mean the market doesn’t operate in the same way as other industries in the shorter term,” she says.

Zurich disagrees, predicting movements in the industry. “If you look at the changing dynamics of the UK distribution landscape, we believe that consolidation is inevitable in the adviser platform space. Conversely, we believe we will see new entrants to the institutional and D2C markets. Overall, while we don’t see a significant reduction in the overall number of platforms over the next three years, we do see the mix of adviser, institutional and D2C platforms changing.”

Transparent pricing

Some platforms opt for a flat pricing model across all assets, while others employ a range – typically cheaper for greater levels of assets on a tiered basis – as detailed in Table 3. Only a few still use a set-up fee, with the Praemium £150 charge standing out as expensive. Henry Kingsbury, marketing executive at the firm, says the fixed amount is potentially better value than a percentage charge for those with considerable assets. Annual management charges range from zero to 0.5 per cent, with Ascentric and Cofunds employing an additional yearly charge of £60 and £40 respectively.

As transparent pricing moves forward, competitive pricing at the platform end will become even more important. But the main price issue, taking up the time of advisers, fund managers and platforms, is fund fees and share classes.

The policy statement PS13/1 on fees, ‘Payments to platform service providers and cash rebates from providers to consumers’, was published by the FCA on 26 April 2013. It contained few surprises, with the majority of the final rules exactly what providers expected:

• Platforms will have to be paid for by a platform charge disclosed to, and agreed by, the consumer;

• Cash rebates will be banned, except where they have a value of less than £1 per fund per month, which will then be taxed;

• Unit rebates will be allowed to continue, but will be taxable;

• All new business will be subject to the rules from 6 April 2014;

• All legacy business on platforms must have commission turned off, or be switched to clean share classes, by 6 April 2016.

The HMRC announcement that unit rebates would be taxed came just a month before the FCA’s final paper, with the two working in tandem to effectively end rebates.

“If the HMRC announcement sounded the death knell for rebates than the FCA’s platform paper will lay them to rest,” says David Thompson, managing director of Axa Elevate. “Although there is no outright ban on unit rebates we expect demand to continue to fall and the shift towards clean share classes to accelerate.”

But the sunset clause could cause tensions in the industry – and problems for advisers trying to get all clients on the same basis – as they will not all necessarily be updating at the same pace.

“The FCA’s decision around sunset clauses for rebates looks set to create an uneven playing field,” Mr Thompson says.

“The platform paper’s two-year transition period could see ‘old world’ firms continue to pocket fund rebates, while firms acting more in the spirit of the RDR may be penalised by banning the passing of rebates to clients from April 2014. We would like to see a two-year sunset clause on the cash rebate ban so that it comes in at the same time as the wider ban on legacy arrangements to avoid disadvantaging advisers and their clients and placing undue pressure on the platform industry.”

If the ban on cash rebates goes ahead from April 2014, he adds, all existing wrap clients will have to move their investment holdings to clean share classes before this date. This is heavily reliant on fund managers making clean share classes available and investors could potentially see a rise in charges, at least in the short term, as they move share class.

Ms Muir at Aviva believes instead that the price danger lies in the longer term.

“In the shorter term we have seen very little evidence to suggest that the clean share class prices in the market will be higher than the current ‘dirty’ prices minus rebates, so customers should certainly be no worse off,” she says.

“Thinking longer term though, there will most likely be greater barriers – such as having to produce a new share class – to fund providers reducing prices, where today increasing the level of rebates paid on the same fund class could be done relatively simply. Over time this could lead to a price stickiness that would not favour customers, even though they are getting increased clarity on what they are paying.”

While many advisers have moved toward clean pricing already, some have not, and the reliance on trail commission must come to an end with the sunset clause.

Chart 1 shows the projected decline in trail earnings with the RDR implementation and how this has been further affected by the paper. Those relying on trail need to act now to tackle a reducing revenue stream. While many have already done so, or have been operating on at least a partial fee basis for many years, others will have a significant amount of what to do. The RDR had previously thrown this need into the spotlight, but the platform paper has made it even more urgent.

Table A details the number of clean share classes available on each platform, showing some are much further down the line than others. WealthManager+ has zero – although perhaps has less incentive to make alterations as a direct-to-consumer platform, while adviser platforms range from 500 on Standard Life wrap to whole of market on 7iM and Sippcentre. It also shows how many DFMs platforms are linked to, investment options, and availability of wrappers.

Super clean

There is also a debate over ‘super clean’ prices: cheaper fund classes made available to large-scale distributors. On one hand, it is a sensible conclusion that those who bring in more business should be able to access better pricing. On the other hand, it can be argued that investors should not be penalised for using a smaller platform and those platforms should be able to access the lower rates too.

“The big platforms are very influential because they can bring in massive inflows,” says Chris Smeaton, head of product development at James Hay. But smaller platforms often focus more on transparency, he adds, and are growing at a much faster rate than the big players.

“It is inevitable that Tesco will want a better deal than the corner shop, that is basic business,” Mr Smeaton says. “I think we will end up with the big distributors getting better deals. However, I don’t think the differential is going to be that big. They tend to get 0.2 percentage points better but it is not the be all and end all.”

Billy Mackay, marketing director at AJ Bell, believes that having to be open about better rates under transparent pricing legislation will put platforms off wanting to secure better deals. “The key issue here is that any terms secured by a platform will be visible for all others to see,” he says. “This simple fact is likely to dampen the enthusiasm of any fund group considering offering deals.”

Important extras

The poor interest rates on cash accounts are not a new story. As Table 4 shows, rates paid remain low; the best available is from Transact at 0.94 per cent. Notably Transact is one of the companies that does not retain any interest, whereas 10 providers do. This is a contentious point and one that investors would be entitled to consider. Why is part of their interest is skimmed off?

This is just one part of the overall platform picture, one of the elements advisers have to consider when selecting an appropriate choice. It may be that one platform does not suit all clients’ needs; the regulator has made it clear that, if an adviser’s preferred platform is not suitable, another should be used or going off-platform may be necessary.

“For IFAs, we believe the key thing for them is to have a system for identifying clients who have needs beyond the platform,” says Zurich. “If they have this system, they may not encounter many customers whose needs aren’t met by one platform – but they need to be able to identify those whose needs aren’t met and have a proper system for serving and advising them.”

The platform world has developed significantly over the past few years and will continue to do so. But the platform paper, while adding long-term clarity, will continue to muddy the waters in the meantime.