Dentists have bad teeth, I suppose.
Anyway, the lack of first-hand experience of the proposition you are working on or selling leads to all kinds of undesirable outcomes. I well remember a Glasgow IFA showing me a suitcase full (a small suitcase, but still) of contract notes and other rubbish that had been spewed out on one wrap proposition I used to work on.
So where do all these platforms bigwigs hold their money, if not on the fine kit they punt? The answer, overwhelmingly, is Hargreaves Lansdown or Alliance Trust Savings (ATS). This is based on a non-scientific survey, but I bet all the money in Peter Hargreaves’ pockets that it’s true.
It is not entirely surprising, then, that the industry has been staring intently at developments in the direct platforms market as providers therein start to unbundle their offerings and come clean on their price.
For the purposes of this column we are not interested in who is cheapest (generally iWeb) or most expensive, but instead in whether there are any emerging trends in the direct space which might map across to the advised sector.
And yes, there are. Which is a relief, because this would be a short column otherwise. We’ll do them in a minute, but it is worth mentioning that the advised platform sector really could do with a shot of something. Bar ATS, there has been little movement on the fixed-fee front, and the pricing announcements we have seen in the past six months or so are mainly just nips and tucks. All very dull.
So what is there to be excited about in the direct landscape?
Fixed fees
A properly competitive market is developing around this shape, which suits those with larger funds - such is the nature of arithmetic. Some providers go for wrapper fees; others try to minimise those and concentrate on dealing fees; others go for a hybrid. We are talking mainly about Isas and General Investment Accounts (GIAs) here; Sipps generally all attract additional wrapper charges (apart from Bestinvest, whose Sipp is weirdly cheaper than its Isa). The bleeding edge is represented by iWeb, whose system is certainly unsophisticated and clunky, but at £5 a trade and no other day-to-day charges who cares? Hold a 10-fund portfolio, switch five of those funds in a year (so 10 trades) and you pay just £50 for your Isa with a £25 set-up cost in year one. With, for example, £75,000 in your pot, that’s a princely seven basis points.
Others may moan about sustainability, but iWeb is part of Halifax and is designed, I would suggest, to gauge demand for ultra-skinny, low-cost services. A look at this Table and it will be immediately clear that fixed fee is the way to go for the more affluent investor, unless you are a total trade hound. Why haven’t more advisers gone fixed fee in their platform choice? Because there is not a market yet. Your choice is ATS or ATS, and while the Dundonians are a fine outfit, they don’t suit everyone. So there is lots of room for advised platforms to get creative, spot the trend coming over from the direct side, and suit up.
Charge caps
No, not the horrible regulatory ones. Nasty regulator. No, these are nice, gentle caps. The kind of cap one might place gently upon the head of a laughing child. Finally, a number of the percentage-based charging providers have realised that enough is enough and have put in a charging tranche at
0 per cent; effectively capping the charge. Hargreaves Lansdown was first to go with a cap at £2m, with an effective maximum ongoing charge (assuming 100 per cent investment in funds) of £4,000. Now, £4,000 is a lot, especially when it is per account (so Sipp, GIA and Isa all count as their own £2m).
So it is no surprise that Fidelity and then Barclays weighed in with caps at £1m (£2,000 charge, counted across all pots) and £500,000 (£1,750, counted across all pots) respectively. Virtually no advised platforms do this; all are content to capture what I call ‘lazy upside’ from richer investors. Sometimes their top tranches are only a few basis points but that is not the point.
There is a point at which enough is enough and you are just being greedy. No one needs £4,000 a year to run a basic fund Isa. You can get the same thing, including trades, for about £250. It is nonsense, and it would be good to see more platforms that charge on a percentage basis declare a cap.
Overall charge levels
This is interesting. By rights it should be cheaper to run an advised platform than a direct one. Direct investors are more prone to errors, do stupid stuff (which is why the industry believes it need advisers to save them from themselves, because being patronising is always a sound marketing strategy) and whine a lot. Advisers are ruthlessly efficient, loyal, and never screw up. So if that is true, why are direct platforms cheaper than their advised counterparts? Why would a client pay 0.4 per cent for a basic Isa when it can get the same thing for 0.25 per cent with Charles Stanley or Cavendish?
It is one thing to say that it costs more to get advice - that’s obviously fair - but why should the kit be more expensive when it pretty much does the same thing anyway? Whereas we might have seen direct pricing giving advised platforms a breather by selecting a point just above, the converse is true.
So there are signs of life in the direct market, and judging by the swell of interest in the national and broadcast media, investors are engaging. It is amazing what happens when you tell people what is going on.
And those investors who happen to work in the financial services industry - keep watching this space, lads and lasses. There is plenty more to come, and the effects will be felt in the advised space eventually.
Mark Polson is principal of platform and specialist consultancy the lang cat
