In Platform Pricing Prophecies: Past, Present and Future, the financial services consultant found flows into platforms now account for around 83.72 per cent of advised retail investment – with investors paying up to 18 per cent less in custody costs today than they were in 2011.
For clients with portfolios of £200,000, close to the £190,000 average, the typical platform custody cost has dropped from 0.38 per cent to 0.31 per cent, according to the 16-page dossier.
However, the Lang Cat research found no evidence pointing to a disproportionate amount of assets flowing into cheaper propositions.
Instead, more assets were being invested in the more expensive platform solutions for a time, but it has evened out towards the average.
The report said: “This suggests that advisers are, on the whole, choosing solutions for what they pay other than price, which we’ll call suitability here.
“Clearly this isn’t proof. However, our strong belief is that advisers don’t just randomly move client money around without figuring out (through due diligence) that it’s the right thing to do for clients and their business requirements.”
Meanwhile, the average cost across the market for £100,000 – the most commonly held portfolio size according to the study – and £500,000 portfolios have been reduced by 6bps and 5bps to 0.36 per cent and 0.45 per cent respectively.
The Lang Cat research found no evidence pointing to a disproportionate amount of assets flowing into cheaper propositionsFor Dennis Hall, chief executive of London-based Yellowtail Financial Planning, price is not paramount. Instead, platforms that have the desired asset classes and funds are high on the list of priorities.
He said: “The cost of moving from one platform to another and the time it takes for the process to be completed is not desirable. You can’t buy or sell assets when they are in the ether.
“If you react to every single change a platform makes you will be creating even more work for yourself, which somewhat defeats the purpose of using a platform in the first place.”
Among the key downward forces on custodial fees is the RDR.
During 2011 and 2012, the RDR introduced explicit charging, forcing platform providers to cut their charges to compete with rival firms that had already adopted the fee model, according to the report.
Other contributing factors outlined are competitive pressure, focus on due diligence process and significant migration of assets to platforms.
The culmination of these factors have led to a fall in the market rate by 6bps between 2011 and the end of 2012, the Lang Cat said in the document, adding: “Since then, things have slowed down with a net drop of 0.02 per cent or 2bps in the market rate, despite there being a veritable slew of pricing announcements.
“It means that in the past three years, price cuts have been more about moderate strategic adjustments than ground-breaking market shifts.”
Charges
Platform charges are unlikely to bottom out at 15bps in the next five to 10 years, the Lang Cat said in the report, adding it would require a 57 per cent drop in existing market rate base on a £200,000 portfolio.
“We wouldn’t go as far as to say that it’s impossible, but for such a scenario to play out there would need to be a dramatic change. We’re not anticipating that.”
Robert Forbes, a chartered financial planner with London-based Stadden Forbes Wealth Management, said platforms will seek to acquire new assets from banks instead of stealing business from each other by slashing costs.
He said: “I do, however, think that 15bps is a fair custody charge and just enough for platforms to remain profitable.”
Another 18 per cent market level reduction over the next five years is also unlikely, for a host of reasons according to the Lang Cat – profit margins being one of them.
The study said: “The margins left for continued price cuts are not huge – there’s a fine balance on display. Profitability, for so long the Holy Grail for many in the industry, is too precious to gamble.
“Commercial wiggle room is not at a premium. And we don’t see anyone likely to artificially move the bar to buy market share, and if they did, we think it wouldn’t work.”
The sector is also unlikely to experience a catalysing event akin to the RDR that will drive prices down, the Lang Cat said, adding the platform charges are seemingly moving towards homogenisation.
In addition, there is likely to be more focus on the suitability of propositions to financial planners and their clients, while the trend of platforms going down the vertical integration route to influence asset flows will continue – having a greater impact on total cost of ownership than custody charges, according to the financial services consultancy.
What is more, instead of trimming custodial charges, platforms might explore making further savings from asset management charges, the Lang Cat said.
The report added: “We challenge the assumption that it’s a given that prices have to constantly come down. What if price in this sector is starting to find its natural, sustainable level?”
The Sunset clause, which comes into force on 6 April 2016, requiring platforms to pass on revenues from fund managers to clients, will be a challenge to the three former fund supermarkets, Cofunds, Old Mutual Wealth and FundsNetwork.
The report said: “At best this will prove to be revenue neutral, but we suspect 2015/16 accounts might prove the change to have been a bit more painful. If revenues are falling it’s very difficult to cut your prices further.”
Nonetheless, a reduction in platform charges is likely to happen in the future – albeit at a moderate level, according to the report.
It said that a year-on-year market drop of about a basis point and a half, a pattern that has been apparent since 2013, is likely to occur and settle at around 30bps in five years, and 25bps in 10 years.
There has been talk within the sector that platforms will follow in the footsteps of Alliance Trust Savings and implement a fixed fee model, according to the white paper.
The report said: “If they do, however, it means having to deal with the tricky marketing message of price increases, whereas ad valorem avoids that issue.”
Revenue
Mr Forbes said: “Maybe the fixed fee model will work, maybe it won’t. It is hard to say, but I am sure platforms will keep a keen eye on how businesses such as Alliance Trust Savings perform over the next 24 months.”
The Lang Cat has said it expects to see more price capping, but this strategy is also not without problems. A low cap level could prove to be detrimental when it comes to revenue – forcing platforms to consider hiking their custody charges.
The report said: “But how a platform arrives at the conclusion about how much revenue is enough is an interesting question. And, a platform will always need to have a high proportion of customers below the cap level to allow revenue to increase – because if they’re all above that level you are effectively doing fixed charging and in a cul-de-sac.”
Myron Jobson is a features writer at Financial Adviser
Key points
For clients with portfolios of £200,000, the typical platform custody cost has dropped from 0.38 per cent to 0.31 per cent.
Platform charges are unlikely to bottom out at 15bps in the next five to 10 years.
Platforms could follow in the footsteps of Alliance Trust Savings and implement a fixed fee model.
