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Guide to platforms
PlatformsApr 20 2017

How much choice is enough for platforms

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How much choice is enough for platforms

How much is enough? 

It's a perennial question which covers myriad situations but when it comes to the platform wars, with providers vying with one another to add yet another esoteric offshore fund to boast more choice than another platform, one must ask 'how much choice is enough?'

How much choice do advisers and their clients really need? If you're a whole of market financial adviser, then by default the regulator requires you to be considering every possible option before recommending a particular fund or funds to clients.

However, restricted advisers are not likely to be swayed from one platform to another simply because platform A has 7,000 underlying fund choices while platform B only has 6,500.

As Lee Robertson, chief executive of Investment Quorum comments: "Restricted advisers do not need thousands of funds on-platform, although of course even restricted advisers should be doing due diligence and making fund choices and changes.

"This means they need a wider fund universe than their current portfolio choices."

What's missing?

Exchange-traded funds and investment trusts are not on every platform. 

While some providers have prided themselves on offering a completely whole-of market proposition, others still restrict investment trust offerings to their own brand, or not put them on at all.

Politically, some provider-operated platforms did not like ETFs as they had open-ended investment company (Oeic) fund ranges they preferred to have chosen. Lee Robertson

Reasons given in the past for not including investment trusts on platform have included that as advisers haven't used them in any significant number, therefore there is no perceived need to have them on platform.

Conversely, advisers have said because the main platform they use does not offer access to investment trusts, this is why they have not used them.

In 2013, Darius McDermott, chief executive of Chelsea Financial Services (CFS), told Financial Adviser it would be helpful if Cofunds, the platform used by CFS, were to add investment trusts, so CFS could research and recommend them.

Mr Robertson says: "I think some of the reasons for investment trusts not being on platform are historic, as they were largely ignored by most of the adviser community for pricing and earnings issues, although this should have changes post-retail distribution review."

Other reasons for the lack of ITs on platform could be because of the 'difficulty' cited by some larger and less nimble platforms, as getting new funds or different types of funds can be tricky, according to Mr Robertson.

Again, there may even be a 'political' or 'competitive' advantage to platforms eschewing passives and investment trusts.

As Mr Robertson comments: "Politically, some provider-operated platforms did not like ETFs as they had open-ended investment company (Oeic) fund ranges they preferred to have chosen."

How much is enough? This question applies to so many life situations but in the case of how many fund choices should be available on platforms, the answer seems to be “it depends”.

It depends on who you ask – advisers always say it depends on the client, providers tend to say it depends on the adviser, and consultants say it depends on the platforms and the market segment in which they are trying to build market share.

Headlines once focused on the number of funds available on certain platforms as if it were a competition; the more funds, the more advisers would choose you. It was a numbers game.

For example: 

2011: AJBell adds 1,000 funds to SippCentre platform 

2013: Alliance Trust adds more clean funds to platform 

Things escalated after 2013 with the advent of 'clean fund' pricing and 'super clean' fund pricing of underlying investment funds: there was a race to be seen to be adopting Retail Distribution Review-friendly fund pricing structures on-platform.

Now, fund choice is less of a bragging right and more of a ‘if it’s needed’ argument.

It depends on the adviser

For Kevin Russell, proposition director for SEI Wealth Platform, “It depends on what the adviser’s client proposition is.

“If advisers are concentrating their business on providing financial planning, then the investment decisions are likely to be outsourced. In that universe, advisers do not need thousands of funds to choose from, as the market is moving towards risk-based managed or model portfolios, provided by their outsourced partners.”

Mr Russell says firms which offer clients bespoke investment solutions need a “much broader” suite of investment options, including funds, equities, exchange-traded funds and other instruments.

In agreement with this view is Mark Till, chief distribution and marketing officer for Aegon, who says: “Fund choice ultimately comes down to the adviser. 

“The role of the platform is to ensure advisers can easily and seamlessly service their customers.

“Having the investment options they want is crucial. Platforms that cannot support this will find it difficult to retain the loyalty of their users.”

Mark Polson, founder of consultancy The Lang Cat, comments: "It's not really about whether an adviser is whole-of-market, restricted, independent or whatever; it's the commercials of developing core platform functionality to deal with these instruments, which behave quite differently from vanilla mutual funds."

It depends on the platform

Eric Welsby, head of partner management, EMEA, for Bravura Solutions, says: “It all depends on the platform and its target market. 

“If the platform is hoping to support advisers who are DFMs, then a wide range of asset types are a must. 

“Conversely, if the platform is only offering an in-house DFM service, then the required asset universe can be much smaller.”

It is clear there are logistical reasons why platforms cannot have every possible fund.

It's a classic product development Catch-22: there's no demand so it doesn't get developed, which means there is no demand. Mark Polson

Mr Welsby comments on the breadth of assets as a “key multiplier” of cost in any platform operating model, as the positions need to be reconciled daily. Therefore, as the number of assets any member of staff can reconcile is finite, the effort required to do the reconciliation is “not directly proportional to the value of the holding in any one asset”.

However, greater technological developments – and the significant investment required to upgrade platform software with such developments – means it will not be too much longer before all platforms are able to be all things to all men.

It depends on the end client

“No-one needs thousands of funds,” says Mr Polson. “Everyone needs the right amount”.

This argument has been used by platforms to explain why they have not put a whole range of funds - such as investment trusts and exchange-traded funds - onto their systems. It has also been used by platforms to explain why they've added these funds. "It depends on the end client."

Some platforms, such as Cofunds and Fidelity FundsNetwork, have been slow to add exchange-traded funds and externally managed investment trusts to their range.

As late as 2015, Fidelity FundsNetwork said it would start hosting external investment trusts when veteran investor Neil Woodford announced he would be launching an investment trust, and the hype around this meant platforms offering it would get a fair chunk of money. 

It took the fame of Mr Woodford and 15 years for FundsNetwork to open up to externally managed investment trusts; the platform was created in 2000, as an online fund supermarket. 

Exchange-traded funds (ETFs) are another relative newcomer to the fund universe and many providers are not equipped yet to put them onto the platform, given the frequency of trading involved.

Mr Till says: “Most assets on platforms are in funds, not equities and ETFs, but ETFs are becoming more popular. Some of the platforms do not have the systems to handle the additional complexity at scale.”

According to Mr Welsby, ETFs are “not straightforward to run on an aggregated basis.

“Exchange-traded assets typically only trade in whole shares, meaning simply aggregating tens of thousands of clients’ deals and placing an order to buy the corresponding number of shares will not work when it comes to disaggregating the shares to the end client accounts.”

Mr Polson adds: “The issue is the right funds vary from firm to firm, so you quickly see the lists rack up.

"The truth is, underlying custodians and fund engines such as FNZ, Allfunds and others offer all these links as a matter of course, so you get relatively few efficiencies by cutting down the list these days.

"In terms of other assets, this is normally because exchange-traded assets are enabled through expensive and pretty ropey third-party links to stockbrokers.

"It's a classic product development Catch-22: there's no demand so it doesn't get developed, which means there is no demand.”

simoney.kyriakou@ft.com