Platforms' poor business processes have led to a lack of choice of alternative funds for advisers and their clients, a senior trade body director has claimed.
Paul Richards, managing director of the Association of Real Estate Funds, said there were too few real estate funds available on adviser-centric platforms, and this was caused by the platform's inability to manage differences in portfolio rebalancing.
He said: "One of the biggest problems facing adviser and client access to real estate funds is the lack of availability on platforms, except for the small number of daily-traded funds which hold high levels of cash.
"We have had several conversations with platform providers over the past year and, as I understand it, the main problem is the need to change business processes, particularly around portfolio rebalancing."
If advisers were making enough noise about them, I think the software could evolve quickly.Rich Mayor, the Lang CatFor example, Richards said if an adviser agreed a rebalancing with a client on 30 June, this could be executed on 1 July for daily traded funds.
However, for funds with longer notice periods, the rebalancing might take until September.
According to Richards, most platforms are not set up to be able to process less liquid funds, so they do not offer them. However, he said this does not appear to be an issue for the institutional market.
Richards added if platforms invested in better software, and could communicate better with clients and advisers in terms of notice periods, it would not be an obstacle to adding funds such as real estate investments into the client's portfolio.
He said: "Clients would gain the benefits of real estate funds with longer notice periods, but would have to change their expectations around portfolio management.
"As a secondary issue, software would also need to be changed to reflect the change in business process, but this is not a serious obstacle.”
Demand and diversification
Rich Mayor, senior analyst at the Lang Cat consultancy, said the software could "evolve quickly" if there were enough demand from advisers, but said he did not think the advice market is demanding higher access to alternatives on platforms.
Moreover because many managed funds and discretionary managed portfolios can access less liquid investments, he said he believed exposure to such assets might be gained indirectly rather than directly on platforms by retail investors and their advisers.
He said: "This highlights the difference between the dynamics of the retail vs. the institutional space. We’ve seen property fund suspensions such as the Henderson funds a few years back where the regulator, advisers and clients had real concerns over the liquidity of these investments.
The main problem is the need to change business processes, particularly around portfolio rebalancing.Paul Richards, Aref"Though we hear pockets of these kinds of requests, we think demand is pretty low and we observe a trend towards simplifying portfolios. If advisers were making enough noise about them, I think the software could evolve quickly, which leads me to think the demand isn’t there."
Mayor added: "It’s worth noting that alternatives do make their way into multi-asset funds, which have the diversification to remain daily traded and so more appropriate for retail investors, so it’s not like the door’s closed."
Also according to Mayor, there could be an element of caution over the incoming consumer duty rules, which might make platforms even more reticent to add such investments.
He explained: "If we’ve got our consumer duty hat on, I think platforms are going to be more reticent to add these types of investments in future due to the new requirements around preventing foreseeable harm."
However, it could be argued that a lack of choice on platforms could also be seen by the regulator as not operating in the best potential interest of clients.
simoney.kyriakou@ft.com
