PlatformsJul 17 2018

Real reason advisers don't switch platforms revealed

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Real reason advisers don't switch platforms revealed

Advisers are put off switching clients to new platforms by "out of market risk" eroding the savings generated by moving to a cheaper fund supermarket, according to platform experts.

In the FCA's 110-page Platforms Market Study interim report, published yesterday (16 July), the regulator stated the switching process for investors was complex and time consuming.

Almost half of consumers who have not switched nor considered switching platform are happy as they are.

But the FCA found that 7 per cent of consumers have tried to switch at some point but failed mainly because of the time involved, the complexity of the process and exit fees.

However platform experts FTAdviser has spoken to claimed while the time it takes to switch is an issue - with the FCA finding it was generally completed in a couple of weeks to a few months - what was putting advisers off ditching one fund supermarket for another was the fear the amount of time their clients could be out of the market while their cash was moved meant the potential benefit of lower platform fees could be cancelled if markets fell.

Terry Huddart, head of proposition at consultancy firm the Lang Cat, said the way switching works when the same share class is not available for a specific fund, the client must sell their holdings in that fund to cash and then buy the different share class. This is one of the barriers for advisers switching fund supermarkets.

Mr Huddart said: "This is really the unintended consequence of something that’s meant to be positive, which is that some platforms, due to scale, are able to get a different share class for a fund, a cheaper one.

“It does put advisers off because it creates a market risk. This can work both ways of course depending on what the markets do in the intervening period but in the worst case time out of market can cost the client many months worth of fees.

“This of course is only one issue as part of the overall costly and time consuming transaction of moving a client from one platform to another"

He said the FCA and the industry should come together to ensure that this time out of the market does not happen.

Mr Huddart suggested the regulator should look at forcing platforms to work along the same lines as banks, where a customer can switch their account instantly.

Richard Withers, head of policy at Vanguard, said his platform's own independent research has also found that people are less likely to take the step of switching their investment provider than they are switching their provider for home insurance, gas or electricity, despite the potential savings being higher.

He said the FCA's report was further evidence that this is significantly influenced by a lack of investor understanding of the true cost of investing, and the impact of costs on returns, as well as the view that switching is too much hassle.

Mr Withers said: “We welcome the FCA’s support for the strengthening of minimum standards for transfer and re-registration times – for too many investors the process currently takes too long. However, there is more that can be done and we would support a ban on unjustified exit fees charged by platforms."

Andy Bell, chief executive of AJ Bell, said transfer times between platforms can be painfully slow and the process is frustrating for everyone involved.  

"The collaborative approach adopted by the FCA here is absolutely appropriate and should ensure workable improvements to the existing framework are brought forward quickly."

He was particularly pleased with the FCA's intention to give advisers clarity around suitability requirements regarding platform switches.

Mr Bell said: "This is a problem we have raised repeatedly with the regulator, with advisers often put off transferring clients on a bulk basis because of the suitability burden it creates. This is acting as a barrier to switching and risks creating poor outcomes for end investors."

Mr Huddart agreed that making bulk transfers - where multiple clients are transferred from one platform to another in a single go - should be a priority for the regulator.

Chris Hill, chief executive at Hargreaves Lansdown, said he welcomes the regulator's determination to make it easier for customers to switch between platforms.

Verona Smith, head of intermediary at Seven Investment Management, said: "The industry has to make it easier for people to switch between platforms.

"At a time when it has become so much easier for consumers to switch bank accounts, the platform industry has moved forward over the years, but we are still not there yet. It’s time these barriers were removed.

"The industry needs to remember that it is a privilege, not a right to look after client money."

david.thorpe@ft.com