Your IndustryMay 21 2015

Impact of move to clean share classes

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As part of ongoing due diligence, it is vital advisers check a move to clean share classes does not impact a platform’s ability to deliver what their client’s need.

Paul Boston, sales director of Novia, says back in 2013 an unnamed platform disclosed that more than 70 per cent of income was from rebates.

Mr Boston says this scenario represents a massive challenge for the business and is likely to impact profitability.

He says: “Either price goes up or delivery slows down.”

Across the market, Barry Neilson, business development director at Nucleus, says platform profitability is generally improving although some are still making huge losses.

Even for those in profit, Mr Neilson says it is important for advisers to be comfortable with the financial position of the platforms they use and to ask questions about the impact of a move to unbundled share classes.

Also, as the sector continues to evolve and get bigger, Mr Neilson says it is important for platforms to have a balance sheet aligned with their growth aspirations.

Having a balance sheet aligned in this way will enable them to continue investing in their propositions, including evolving their pricing, while at the same time, protecting against any future increase in regulatory capital requirements.

Mr Neilson says: “Advisers should consider if any large losses by the platform business are sustainable and how long they could be accepted by the wider group of businesses and shareholders as well as impacting on the platform’s ability to manage their pricing in a more competitive marketplace.

“There are a number of platforms, which are not yet profitable and which have accumulated significant capital losses over the years and advisers should consider their ability, and appetite, to reduce pricing.”

Securing clients the best price moving forward is, of course, important, Mr Neilson adds.

However, he says price consideration should come at the end because comparisons are only valid when comparing solutions that can equally support the delivery of your client’s financial plans.

In terms of moving an investor’s cash about, Alistair Wilson, head of retail platform strategy at Zurich, says removing the ability for platforms to retain a fund manager rebate is driving more and more investments towards clean share classes.

Mr Wilson says this movement then helps with client understanding and continuing the platform journey towards transparency.

He says: “Some platforms will use their market position to offer advisers and their clients cheaper priced units or ‘super clean’ share classes.

“Where a platform makes a super clean share class available but not the equivalent clean share class, this can hinder the re-registration process - it is therefore important both versions of the unit are made available.”

But ultimately the impact of the end of the sunset clause that advisers will feel most keenly is on their own bottom line.

Back in February Parmenion warned FTAdviser the sunset clause will have a severe impact on many firms, pointing out a typical advisory business will see between 10 and 20 per cent of its revenues as trail, arising from products sold over the last 25 years.

A spokesman for Parmenion also warned as service levels for many of these customers will be low so the profit level impact of the withdrawal of trail will be disproportionately greater.

He says: “There will be little immediate cost reduction to offset the lost income.

“We can see un-modernised firms becoming unprofitable or cash flow negative as a result. We don’t see this as high on adviser’s agendas but now is the time to act.”

As a result of this threat, some advisers are reshaping their businesses.

In February, national advice and employee benefits firm Jelf Group announced one area of focus for the next 12 months was to launch “a remote advice service to generate adviser charges for clients where fund-based commission is potentially at threat from the sunset clause in April 2016”.

Lee Coles, head of money after work at Jelf Group, explained to FTAdviser that the focused advice service will initially be rolled out to existing clients.

But, as the rule changes become bedded in, Mr Coles says Jelf will look to win new clients interested in discussing their retirement options.

He says: “This is a combination of two existing strategies really - converting those clients still on commission-based services in the run up to next April over to a more well-defined agreement, while also looking at the opportunities that come out of the pension freedom changes.”