The introduction of the retail distribution review at the start of the year heralded a big change for the financial adviser community and a shift in attitude.
The move from commission to adviser charging and the push for greater transparency has meant many advisers have been placed under great pressure to prove their worth to clients.
This, in turn, has prompted a growing interest in platforms amid their ability to offer consistency, efficiency and a wide range of investments.
As well as offering a cost-effective solution for advisers and investors, platforms were borne 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.
With a healthy amount of providers available to choose from, 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 right platform for your client’s needs is no easy feat and advisers should be investing a lot of time and effort to ensure they have made 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 clear that as the number of propositions in the market continues to grow, 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 accepts that if you have a very defined client base, for example they are all over the age of 60 and have £100,000 minimum investment available, then it is perfectly acceptable to use one platform for all Isas and general investment accounts. In fact, the same platform may 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 clientele which may have comparable circumstances and therefore be seeking similar products.
However, the FCA believes this sort of situation is not going to be too common and that most IFAs will have a mix of client types with different aims.
The FCA has stated that 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 that a firm that wishes to do so would have to find a platform 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 that it remained whole of the 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 compared with 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 important, 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.
Therefore, advisers have a duty to carry out thorough due diligence on the platform to ensure that it is suitable for each client’s particular set of goals and 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 whole of the market in order to maximise the level of suitable advice to their clients.
It comes as little surprise then that we are seeing increasing number of advisers considering outsourcing the investment side to discretionary fund managers for some of their clients. Research carried out by Investec earlier this year showed that the number of advisers who currently outsource to DFMs will increase this year as they seek help with the day-to-day investment management process.
The same research found that a third of advisers also plan to increase the number of client portfolios held on platforms. At present, advisers outsource 11 per cent of their investments to DFMs via 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 FSA’s policy paper?
The long term effect should be to increase business for some of the wrap providers as the larger supermarkets continue to be volume players, offering a really good option at the lower and medium end of the investment business.
Originally designed to provide access to a wide range of mutual funds, their 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 the adviser community as some advisory firms start to consider alternatives.
But I think in many ways we can get too concerned about the impact of RDR, 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 within 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 currently in the market I think there will be some consolidation 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
There has been a growing interest in platforms amid their ability to offer consistency, efficiency and a wide range of investments.
Some platforms are best if you have very few transactions, while others may have a slightly more expensive administration charge but no transaction charges
The long term effect should be to increase business for some of the wrap providers as the larger supermarkets continue to be volume players,
