PlatformOct 19 2017

FCA urged to allow funds to 'pay to play' on platforms

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FCA urged to allow funds to 'pay to play' on platforms

Advisers may not be able to buy the best investments for their clients unless the regulator intervenes with a radical plan to widen access, according to one UK fund house.

Anecdotally platforms require funds reach a certain size before they will list them.

The accusation is that this can lead to better performing funds not being available to advisers and their clients.

One such example can be found within fund global house Orbis Investments.

The funds it runs in the UK, Orbis Global Balanced and Orbis Global Equity, both have assets of less than £50m despite both being among the top 25 per cent of best performing funds in their respective sectors over the last five years.

The £25m Orbis Global Balanced fund was the absolute top performer in the IA Mixed Investment sector in 2016.

Despite the funds' success, Dan Brocklebank, UK director at Orbis Investments, said the firm has faced push back from some of the major platforms who won't make them available because of their small size.

He has written to the Financial Conduct Authority to ask the regulator to investigate whether platforms are becoming a barrier to entry for new funds - and he has proposed a radical solution.

Mr Brocklebank has asked the FCA to permit fund management companies to pay the costs incurred by a platform in hosting a new fund, essentially creating a market for funds to 'pay to play' on platforms and hugely open up smaller funds' opportunity for new investment.

According to the Orbis director, when a relatively unknown fund approaches a platform they are told it costs the platform money to host it.

In order to justify that cost, Mr Brocklebank said platforms ask funds to “show demand for the fund.”

The fund is then faced with a catch-22 situation, said Mr Brocklebank.

"We go to the discretionary wealth managers, and they say they can’t buy us until assets reach a certain size, then we go to the IFAs, and they say the would love to buy the fund but it is not on the platform they use. So it starts to become a barrier to entry.”

He estimated the costs funds would pay to platforms to be £5,000 to £6,000.

The FCA declined to comment on the proposal.

FTAdviser spoke with representatives from Tilney, Aegon and Hargreaves, all of whom denied the size of a fund is a consideration when deciding to place it on their platforms, with evidence of demand from clients being more important.

Stephen Lansdown, co-founder of the platform giant Hargreaves Lansdown, in an exclusive interview with FTAdviser, dismissed the notion that cost prevents platforms from hosting new funds.

Mr Lansdown said a fund not being available to investors because it is not on a particular platform “is the fault of the adviser. If the client wants the fund, then the adviser should buy them the fund”.

In 2015 the FCA stated advisers should be using more than one platform in order to best serve the interests of their client.

Several advisers, who did not wish to be quoted, said a fund not being available on a platform does mean they can’t buy it.

Tom Hawkins, head of platform proposition at Old Mutual Wealth, said: “Our fund range is primarily driven by financial adviser demand, however in order to be added to the platform a fund must also successfully go through a comprehensive due diligence process."

He said this included ensuring the fund’s target market is consistent with Old Mutual's, that the fund does not have an initial charge to the client, and are legally sound.

But he admitted fund size was also a factor.

"To ensure customers are protected we also consider fund size, which is an important factor in determining the liquidity of a fund.”

Jason Hollands, managing director at Tilney Group, said advisers have a role to play in getting a fund onto a platform.

He said: “The fund company will need to demonstrate adviser demand for its product and so advisers and wealth managers who want to use a fund will often help facilitate this.”

Alistair Cunningham, director at Wingate Financial Planning, said he picks funds first by looking at the asset class, then the Morningstar rating, with cost and availability on platforms also a consideration.

david.thorpe@ft.com