The year 2013 was always likely to see an increased focus on platform due diligence. Advisers had their attention firmly on preparing for the RDR during last year, as did platform service providers.
Fast-forward to the second half of 2013 and platform due diligence now appears to be top of the agenda for many firms. Skandia’s most recent adviser research shows that 65 per cent of advisers plan to carry out additional due diligence work following the release of the FCA’s paper, PS13/1. A total of 43 per cent of those advisers said the task is already in hand, with only 13 per cent not planning to conduct any due diligence this year.
Of course, it is easier said than done. As of April 2014, two new rules will be introduced into the conduct of business handbook:
• Using a platform service when advising (section 6.1E.9): A firm must not use a platform service as part of a personal recommendation to a retail client in relation to a retail investment product unless it has satisfied itself that the platform service provider, and its associates, only receive remuneration for business carried on in the UK which is permitted by the rules in this section.
• Using a platform service for arranging and advising (section 6.1F.1): A firm that uses a platform service for that purpose must take reasonable steps to ensure that it uses a platform service which presents its retail investment products without bias.
The responsibility therefore falls on advisers to ensure the platform they are placing business with has met the requirements set out by the FCA. This clearly increases the work required for platform due diligence in 2014, while also raising some significant issues here and now. A key consideration for advisers is how the platform will support its service proposition. It is therefore vital that platforms are able to demonstrate now what the product and pricing model will be come April 2014 and, if there is work required in order to be compliant, how and when this will be delivered.
With that in mind, what does platform due diligence look like in 2013? And what options are available to help advisers?
Regulatory requirements
As ever, a good place to start is with the regulator. In addition to the recent platform paper requirements, there are many documents and factsheets that should be studied. Last year’s guidance on centralised investment propositions sets out the expectations for suitability and the dangers of ‘shoehorning’. These requirements cover platforms in a wider context just as much as any investment solution. Individual suitability is critical, and advisers must be able to prove this has been achieved.
This theme is reinforced in the FSA factsheet for firms that advise on or operate on platforms, with a clear statement on the use of a single platform within an advisory firm. The warning that “it would be very rare, if possible at all” for advisers to use a single platform and maintain independence is stark but clearly highlights the need for segmentation.
What do clients want?
It is, of course, important to consider your client bank from a realistic - not aspirational - perspective. What range and type of services do you want to offer them? More importantly, what will they value? This is not about segmenting clients into boxes; it is about giving the client a range of services and propositions that they can choose, thereby segmenting themselves. From here, you can start to consider what propositions or platforms can best deliver the required services.
Cost is important to advisers as well as clients. It is important that a charge assessment is multi-dimensional, covering not only the total cost of ownership but also the costs incurred while delivering the required service to the client.
The concept of total cost of ownership (TCO) has become widely accepted as the most accurate method of comparing investment costs post-RDR, as detailed in Table 1. A TCO figure is simple to calculate and gives an easy way to understand the current costs - and it is vital that all charges are included, otherwise a false picture of reality is painted. There are four components to assess in order to derive the TCO figure, as shown in the Table.
However, an equally important figure for advisers to consider is the total cost of delivery.
Having identified the ideal service proposition for a client, which platforms have the functionality to power this proposition, and for what cost? Increasingly, this cost assessment is a vital step for advisers, both in financial terms and time.
If a platform does not have the reporting tools required, or if those tools are not integrated into the system, the cost of bringing in the tools and manually keying the data will be an additional burden for the adviser firm to bear.
Raising the bar
The recent platform paper has raised the bar further with regard to advisers’ due diligence obligations. From April 2014, advisers will be required to satisfy themselves that a platform service provider has met the requirements set out within the paper and does not present its products with any bias.
Despite these requirements not coming into play until next year, it is already clear that advisers are including this now in any due diligence assessment being made, in addition to the nine factors the FCA already require to be considered.
The good news is that there are external tools and consultancy services available to advisers to help them with the task.
Michael Barrett is platform marketing manager at Skandia
