Undertaking platform due diligence for an independent financial adviser firm is an interesting proposition as there is no single source of information to carry out this due diligence.
Most advisers that use platforms usually only want to use one platform for the sake of administrative ease.
However, the Financial Conduct Authority (FCA) has stated its unease at the use of a single platform. It feels that no single platform can be the most effective for a wide range of clients with differing amounts of wealth, terms of investment and levels of activity.
This all comes back to the FCA’s desire to see advisers undertake client segmentation to acknowledge the needs of the various types of client and the different service levels that would apply to them, in order to ensure they get a service that meets their needs.
Treating clients fairly does not mean treating all customers the same. The ‘one-size-fits-all’ strategy is surprisingly unlikely to suit many clients.
Many advisers want to be able to offer a centralised proposition, which is the most efficient way of offering investment services to clients.
The ability to present a range of tax wrappers with a variety of funds available within the same place is very attractive, and research should be undertaken to identify platforms that can provide this service.
The FCA wants clients to achieve good outcomes when undertaking financial planning. This means customers need to be considered on an individual basis in order to maximise the likelihood of a positive outcome.
The regulator has expressed doubts about whether ‘block transfers’ from one provider to another can realistically serve the needs of all the clients included in a block transfer.
be best advice for all the clients that are included in a block transfer.
But the competition in the platform market is fierce. There are established platforms and there are new platforms being introduced by insurance companies.
These various offerings have different emphases, whether it is the number of funds and managers, availability of tax wrappers, online functionality for advisers and/or clients, tiered charging structures or back-office efficiency and services. It is these different options that are making the choice between platforms quite complex.
In recent years, there seems to have been a race to the bottom regarding platform charges.
The problem here is that very few platforms are profitable and minimising the charges makes profitability more difficult to achieve.
Functionality for advisers and clients can vary quite considerably. Advisers and their administration want simple systems from which information can be obtained quickly.
The difficulty is that the platforms all use different systems that require a considerable amount of time to master before they become truly useful to clients.
Many advisers carry out their research in what would be considered a static manner – obtaining all the information in a snapshot and relying on this until they carry out their review, probably three, six or 12 months later. The sources of various reports that enable this include Rayner Spencer Mills Research and The Platforum.
There are also several software packages – such as Defaqto Matrix, Adviser Asset, Selectapension and O&M – that enable active searches for each client and scenario. These often involve setting up a basic search template and then inputting variables for client-specific research.
There is a time investment involved in setting up the templates, but they can be fairly straightforward when the adviser or administrator is familiar with the system.
Many platforms and investment providers produce their own due diligence documents, although they have an unerring tendency to recommend their own offerings. They claim to have researched the market to produce the documents – but they cannot all be the best.
In conclusion, the FCA wants advisers to undertake due diligence to identify platforms that provide good investment outcomes for each client. This will probably mean using platforms in line with the client segmentation that independent financial adviser firms have undertaken.
Tony Catt is an independent compliance consultant
INSURANCE PLATFORMS
Expert View
Tony Catt, independent compliance consultant, looks at the new entrants to the platform market:
“The most recent entrants into the platform market are insurance companies. This is [an attempt] to keep all the legacy business that has built up over the years. They are able to offer a better charging structure on the platform than has been offered in [clients’] traditional contracts.
“Thus [the insurance platforms] are taking a bit of a knock by keeping the business at reduced rates, but at least they are keeping the funds under management. They also make the point that because they are more recent to the market, their technology is more advanced, although this has yet to be proved.”
PLATFORM DUE DILIGENCE: KEY POINTS
Some of the issues advisers need to be aware of when undertaking due diligence on platforms:
• FCA guidance is that advisers will need more than one platform to suit all their clients
• Advisers generally tend to use platforms for ease of administration
• Choice of platform is likely to be in line with client segmentation
• Choice of platform must be based on client needs
Platforms: The FCA’s view
In its Factsheet 011: Using platform based investments and the independence rule, published in September 2014, the FCA states:
“We think that it is likely to be very rare, if possible at all, that a firm could use one platform for all clients and meet the independence rule. A firm would have to find a platform offering a range of products covering the whole of the packaged product market (or the whole of a sector of that market). And it would need to keep this range under continual review to ensure that it remained whole-of-market.
“Platforms themselves are under no regulatory requirement to offer any particular products, or to consider whether their offering is whole of the market. Since there are costs to platforms and/or to product providers in including products within their ranges, platforms’ offerings are likely, in most cases, to amount to something less than whole-of-market coverage.
“Firms must not recommend a client invest in a product through a platform if an investment off-platform would be in their best interest or if none of the investment selections available to the firm are suitable.”
It continues: “Where a firm has a diverse range of clients, it may be in the firm’s interests – as well as the clients’ best interests – to use more than one platform. The firm may want to offer different levels of service to different categories of client. Here, we set out the benefits of how clear segmentation of the client bank and effective matching of firm services and platform selection (following good due diligence). Clearly, firms must consider each client individually and ensure they handle any outlier clients appropriately.”
