Platform view: Taking an open approach

Open architecture drives competition in the marketplace requiring fund managers to deliver great value, at competitive prices, and to seek innovation on an on-going basis.

However, there is always a paradox of choice. The more products available, the more difficult it is to navigate to the chosen solution. For this reason, I do see a need to deliver guided solutions. An investment-driven process that allows investors to help navigate the myriad of choice has enormous benefits.

In an unbiased world of no commissions and no rebates, those accessing these services should be free in the knowledge that they are accessing the best products available. I like open architecture, but guided architecture has a role to play.

Article continues after advert

The outcome of the recent regulatory changes has been an increased focus on price. Rather than being paid by the provider, the distributor is now sitting on the same side of the table as the end customer. Securing the best possible price is key.

On one level, the FCA should be complimented on the outcomes it has achieved. There has been a frenzy about who is pricing at what level and whose share classes are so clean that they are now “‘super clean”. As it stands today, the fund providers are still playing a big game of poker, with none quite ready to reveal its full hand.

The big question now is how these preferential terms are being secured. There are two guided models emerging. First, those that look to deliver the best available products in the market. The second model focuses on getting the lowest price products available. Both approaches will at some point converge, but it depends on your starting point – best product or best price?

This is where the basic economic theory of supply and demand plays out. The pricing power usually sits with the fund manager that has the best-quality product with the highest demand. Conversely, a product with lower quality or lower demand is less likely to attract higher prices. There will be more negotiating room.

For some business models, securing the lowest price possible risks creating a product bias in a different guise. There is a risk that products are guided towards those that have acceptable performance at a low price, rather than being the best products. This is not a good consumer outcome.

Guided architecture has a fundamental role to play in the market. However, it should have all the credentials of open architecture – providing the highest levels of integrity in the way the lists are structured.

If the structure is all about securing the lowest cost, then it should be clear to the customer that this is what they are buying and there are possibly better-quality goods to be accessed. If it is just a mechanism to allow a greater chunk of the value chain to be secured, I’m not sure where the good consumer outcome is achieved.