How much interest investment platforms are holding back on client cash was brought to light this week when FTAdviser revealed some pay effectively no interest, and only three platform providers claim they earn nothing from client cash.
Of the 13 platforms who spoke to FTAdviser, seven admitted to paying less than the current rate of 0.5 per cent set by Bank of England.
The worst offender was James Hay, which revealed it pays a nominal interest rate of 0.00001 per cent, or one ten-millionth of the investment after it has taken its undisclosed cut. To put that in perspective, if you had £10m invested you would enjoy the benefit of being paid one extra pound per year (not accounting for compound interest of course!).
A spokesperson for James Hay hilariously reassured readers that this rate would “never fall below zero”. Well that’s a worry off your mind: they won’t actually take any money out of the account, even if they make sure very little goes in.
The company argued that this allowed them to offer lower-cost products, but it’s a justification I personally find hard to swallow.
Other providers muddy the waters further. Standard Life for example pays more than twice the rate of anyone else but it does take an undisclosed slice of the interest rate it negotiates. That’s okay, right?
It depends on how much you value pricing transparency, which remains elusive despite the regulator’s best efforts.
Some platforms already obfuscate their true fees by offering low headline rates and then charging for the most basic extras in the same manner as low-cost airline Ryanair, now advisers have this to contend with.
Even worse: the lack of openness over whether they keep any interest is exacerbated by the fact that some platforms include within this suite of extra fees a separate administration charge for handling money.
According to Transact’s Jonathan Gunby, this ‘cash management administration charge’ can often be “higher than the interest, so you would end up with a negative figure”.
So, how cheap is your platform? You probably don’t know, unless you’ve managed to calculate the initial fee, negotiated fund management charges, ongoing admin fees, transaction fees, switching costs, charges for dealing in paper or over the telephone, exit fees, cash management admin charges, retained client interest (and potentially more).
Once you’ve done all of that you then need to find a way of comparing that sensibly to another platform that will apply some but not all of these and to varying degrees. Simple, eh?
Alright, who started this?
The Association of Professional Financial Advisers did a strange bit of backtracking this week, although ‘sidetracking’ might be a more accurate term.
It all began earlier this month when Apfa demanded the FCA compensate advisers who do not hold client money for the alleged overpayment of fees which the regulator somewhat admitted to in October.
It was quite a ring to step onto for Apfa, and I felt a twinge of sympathy for the association when Martin Wheatley roundly dismissed the idea days later, not unreasonably because it does not have a pot of money to pay this from and so would have to levy another group of firms.
Now, Panacea Adviser has come out calling for advisers to refuse to pay their fees if they can prove they have previously overpaid - and asking for Apfa’s support. Apfa has refused to back the idea, saying that doing so would be starting a “fight [advisers] could not win”.
I tend to agree, but who exactly started the fight in the first place? Apfa were the ones clamouring for compensation in what could easily be seen as the trade association equivalent of “clickbait”.
Choosing your battles
Speaking of fights you can’t win, I imagine advisers were feeling especially demoralised this week when the Financial Services Compensation Scheme revealed it was set to add a bill of £105m to its levy on the investment intermediation sub-sector, a rise of 38 per cent, and hike the levy by 32 per cent for those in the pension intermediation sub-sector.
This is due to the FSCS paying redress to investors over the collapsed firm Catalyst Investment Group and an anticipated rise in Sipp complaints, so I imagine arguments about successful companies having to pay for others’ mistakes (or greed) are beginning to feel a bit feeble as the regulatory cost ratchet continues to squeeze ever tighter.
Apfa responded by telling advisers to keep their chin up, arguing that this might actually benefit advisers in the long term by eliminating the need for an interim levy. Indeed, it predicted fees would fall over the next two years.
Let’s hope they are right.
And in other news...
In other news, Fidelity pinned its colours to the platform pricing mast this week as it handily undercut Hargreaves Lansdown with its lower costs. It faced similar calls, however, that without an automated switch policy existing customer inertia was plumping its profit pillow.
Pensions minister Steve Webb confirmed speculation that the planned pension fee cap would be delayed for at least a year, which commentators said will give employers “breathing space”. We’ll have to wait and see if Mr Webb’s obvious commitment to the policy prevents getting kicked even further into the long grass.
