PlatformsApr 24 2014

The pressure of picking a platform

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This, in turn, has prompted a growing interest in platforms and their capacity for consistency, efficiency and a wide range of investments. As well as offering a cost-effective solution for advisers and investors, platforms were born out of a desire to address clients’ investment needs from one place by enhancing client communications.

At present there are around 30 platform providers in the market, with further growth opportunities on the horizon.

There are a healthy number of providers to choose from, and advisers have a long list of boxes that need ticking: they must consider the range of products available, the charges involved, the standard of service, fund choices and, of course, the security of the platform.

Selecting the platform for a client’s needs is not easy and advisers should be investing a lot of time and effort to ensure they make the right decision.

However, with the onslaught of RDR forcing advisers to choose between independent and restricted advice, there was much talk about what constituted the former, and many advisers were left unsure if using only one platform would compromise their independence. The FCA has already made it clear that as the number of propositions in the market increases, platforms must offer the full range of investment vehicles if they are to be of use to advisers who have gone down the independent route.

The FCA acknowledges that if you have a very defined client base – for example, they are all over the age of 60 and have a minimum of £100,000 to invest – it is acceptable to use one platform for all Isas and general investment accounts. In fact, the same platform might even be suitable for pensions if they have a competitive Sipp with drawdown and the flexibility to deal with clients’ requirements. A large proportion of independent firms tend to gain new clients through referrals from existing clients who are in comparable circumstances and might be seeking similar products.

However, the FCA believes that such situations are not that common and that most IFAs will have a mix of client types with different aims. The FCA has stated it finds it “likely to be very rare, if possible at all, that a firm could use one platform for all clients and meet the independence rule”.

Indeed, the FCA has said a firm that wishes to use one platform would have to find one that offered a range of products covering the whole of the packaged product market. Furthermore, it would need to keep this range under continual review to ensure it remained whole-of-market. Much more likely, it believes, is the need for multi-platforms.

A wealthy older client who has built up substantial savings will have completely different aims and requirements to a younger client starting off with some regular savings. For the older client, a wide choice of investments with possibly low transaction costs for switches may be of the utmost importance, while the younger client will want a low-cost product with a reasonable choice of funds.

Some platforms are best if you have very few transactions, while others may have a slightly more expensive administration charge but no transaction charges, making switching or rebalancing cost-effective. Advisers, therefore, have a duty to carry out thorough due diligence on the platform to ensure that it is suitable for each client’s goals and that these are fully explained to the client before a decision is made.

The FCA is careful to stress that the outcome it is seeking is not simply making sure a spread of investments meets the independence rule, but rather that advisers are mindful of the range of product and investment options available across the market in order to maximise the level of suitable advice to their clients.

It comes as little surprise, then, that increasing numbers of advisers are considering outsourcing the investment side to discretionary fund managers for some clients. Research by Investec last year showed that the number of advisers who outsource to DFMs will increase this year as they seek help with day-to-day investment management.

The same research found that a third of advisers planned to increase the number of client portfolios held on platforms. At present, advisers outsource 11 per cent of their investments to DFMs through a platform.

Of course, choosing to outsource may have a bearing on the platform chosen and this should be carefully considered, especially as the regulator has warned against advisers using DFMs as a default investment solution.

So what does the future hold for the platform industry in the wake of the FCA’s policy paper?

The long-term effect should be to increase business for some wrap providers as the larger supermarkets continue to be volume players, offering a really good option at the lower end and mid-range of the investment business.

Originally designed to provide access to a wide range of mutual funds, platforms’ popularity has led them to develop and include other tax wrappers, such as pensions and unit-linked bonds. We are already witnessing an increase in the number of investors using their low-cost Sipp wrappers.

For those more wealthy clients, or those desiring a wider choice of investments, the open-architecture wrap providers may be more suitable. It may also be the case that for the wealthier clients who demand and expect a high level of service, the smaller, more personalised service providers will be the most appropriate.

For some of the smaller players in the market, the FCA’s push for a multi-platform approach could lead to an increase in business, or at least interest, from advisory firms as some start to consider alternatives.

But in many ways we can get too concerned about the impact of RDR, the pressure for a multi-platform approach and indeed the treatment of rebates on platforms. There will always be something new going on in the market and changes in our industry. As the platform industry continues to mature, I am sure there will still be a few new entrants, perhaps from overseas.

Among the platforms on the market, there will be some consolidation – as we have seen with L&G acquiring Cofunds – but not necessarily the big players buying up the smaller ones. It is the larger players with high overheads whose owners at some stage expect a return for their investment. Consolidation where there can be savings, be it another large platform or financial institution, has to be an option.

Harry Kerr is director of Avalon Investment Services

Key points

The introduction of the RDR at the start of last year meant advisers had to be more careful about how they select their platforms

The FCA acknowledges that if you have a very defined client base, it is perfectly acceptable to use one platform

For some of the smaller players in the market, the FCA’s push for a multi-platform approach could lead to an increase in business