It is more than 13 years since platforms were introduced to the UK. During that time some fundamental changes have occurred, particularly among the financial adviser community.
In 2000, two models of platforms were launched. The first became known as a ‘wrap service’, which arrived on the scene in March, followed a few months later by the second model, a ‘fund supermarket’. Both were aimed at advisers but had quite different characteristics.
The wrap service was paid for by the investor, who also paid their adviser. The fund supermarket derived all of its revenue from the fund managers and the platform forwarded on payments to adviser firms by way of commission. Because the wrap service was not dependent on payments from fund managers or other providers, it could offer the widest choice of investments and was not limited to those who could afford to pay the fund supermarket to be represented on their shelf-space. The wraps then became, by definition, ‘open architecture’. Over the years, both models attracted supporters among advisers.
The role of platforms
In June 2007, the FSA published the first of its papers on the RDR and one of those, DP07/02, was entitled Platforms: The role of wraps and fund supermarkets. So, right from the start, the FSA recognised the importance of platforms in implementing the desired outcomes of the RDR.
By the end of 2012 it was clear the fund supermarket model was no longer fit for purpose and changes were introduced. The first thing they had to do was accommodate adviser charging, which has proved to be no easy task.
The second was not to take payments from fund managers which were soon to be banned. It was assumed they would have to open up the choice of investments available on their platform - some of this is starting to happen, but there is some way to go yet. In other words, it would seem logical that they would have to adopt the wrap model. But wraps have also evolved over 13 years and the competition among providers of wrap services has ensured that they have been more responsive to advisers’ needs.
Simple demands
But what are the basic requirements of advisers when considering the choice of wrap platform?
Some of the must-have demands and comments of advisers include unbundled charging and open architecture, offering access to a greater range of funds.
The financial stability and long-term commitment of the wrap provider is also important. There have been exits during the past decade (American Express, UBS, Aviva’s first effort and Macquarie) as perhaps they could not see a profit being achieved in their required timeframe.
While no clients have suffered any financial loss as a result of these withdrawals, it is both burdensome and expensive for financial advisers having to migrate their client portfolios to another platform.
Since it is difficult for advisers to judge how long shareholders might be willing to sustain a loss-making platform, more attention is now paid to whether they are actually profitable or at least close to achieving this.
Drastic changes
Attention in recent years has focused on the costs of the competing platforms and this has driven margins down. At the same time, examples of poor service have caused advisers to seek a balance between cost and service.
Reports from industry commentators and research houses indicate the quality of service is now consistently ranked in the top three demands of intermediaries. Advisers tell us time and again the delivery of the promise is far more important than just the stating of it.
Moving beyond these basic demands, financial advisers have also been undergoing some drastic changes to their own business models. As a result, wrap services have responded and the development costs of satisfying this most demanding of markets has now become an area of investigation for the vigilant adviser. But can all platforms afford the developments needed? The pattern of a few software providers serving the majority of platforms should bring the costs of development down in time, but will also be likely to bring more homogeneity than some of the platforms would have at first supposed.
Factors to examine
Advisers are at different stages of their own development and will want differing degrees of capability from the platforms they are examining. Changing clients from one platform to another is both time consuming and disruptive, so advisers will want to make the right choice not just to fit the needs of clients now, but for many years to come. So what other factors might they be wise to examine?
Whether an adviser plans to manage the investments or pass these to a discretionary fund manager (DFM), increasingly more advisers are establishing a series of model portfolios. This ensures a consistent approach, and makes quick and efficient changes to the portfolios more straightforward.
In addition, advisers should undertake some performance analysis. It is important to be able to refer clients to the objectives agreed at the outset and to be able to measure performance against benchmarks over different review periods. This facility on a platform is particularly helpful at review meetings with clients. These reports should accurately reflect what has actually happened to the client portfolio, not just function as a back-testing exercise on a bunch of assets that does not reflect the true historical holdings of the client.
Access to various tools is increasingly important; for example, fund research, asset allocation, performance reporting, risk-profiling systems and even cash-flow modelling. If an adviser is offering a holistic service then ensuring clients have some of their assets in a general investment account and then being able to calculate a potential gain or loss prior to disposal using a capital gains tax calculator is an essential part of the service.
Family discounts can also be valuable. By linking portfolios for various members of the same family, savings can apply where the platform’s charges are reduced. This can also benefit clients who have trust-based portfolios or where they are company directors who have a corporate portfolio.
Prompt and accurate end of tax year statements and reports should be in a form readily usable by the client or their accountant.
Direct telephone line access to support teams and technical teams who can give authoritative and reliable advice on matters ranging from pensions to tax, trusts and product specifications should be available. Field-based support or ‘implementation’ teams can also be considered. It is sometimes underestimated just how different administering business run on a platform is to the way in which advisers’ administrators have been used to dealing with product providers in the past. These members of the platform’s team are usually recruited internally and have years of experience helping advisers’ staff because they are familiar with all aspects of the platform’s systems.
Finally, adviser charging should be clear. It is not enough for a platform to say ‘we accommodate adviser charging’ if all it means by this is it now offers a cash account for each client from which clients – via their adviser – can instruct the platform to make payments for the advice. Over the years, advisers who are familiar with wraps have evolved their own charging structures. These have been through various iterations for different clients for the different services they offer.
Don’t get left behind
These are some, but not an exhaustive list, of the requirements already demanded by advisers. As the financial adviser moves inexorably to the more satisfying role of financial planner – as many are already doing – the demands will increase. Financial planners are already providing a service that was previously the domain of the private bank or wealth manager.
Wrap services will need to ensure they meet the needs and demands of this group if they are not to get left behind. In terms of the importance financial planners will play in the market over the next decade, they will not want their client offering to be held back by the inability of their platform to be able to accommodate their requirements.
Malcolm Murray is head of marketing at Transact.
