Platform providers have been encouraged to introduce a charging cap for portfolios that exceed a threshold amount of assets to help motivate larger clients to use the products.
Typically platforms offer a graduated fee structure where charges are lowered as the band of assets becomes larger, allowing clients to benefit from economies of scale.
But providers have been pushed to take this a step further by imposing a cap on fees above a certain threshold, so that investors are not effectively punished for adding more money to a platform.
Mark Polson, principle at the langcat, said that there comes a point where a percentage based charging structure “simply runs out of steam”
“We think platforms should and will move towards a zero charge – effectively a cap – for very large portfolios. There comes a point at which you’ve simply made enough money from a client and it’s time to retire from the field gracefully,” Mr Polson said.
“It’s a good move for clients, of course – platforms might feel otherwise.”
The suggestion would see platforms keep their current graduated charging structure to a point, then above a certain threshold additional fees would no longer be charged.
Christopher Foster, partner at Pennines Independent Financial Advisers, called the suggestion a “great move” as it would help platforms consolidate larger portfolios.
“I think that’s a good thing as, once they have covered their costs and profit margin I am guessing it should not cost more to run £10m than £2m. Certainly, it is sometimes difficult explaining why some platforms – such as James Brearley – charge a flat fee and others, a percentage.”
Some platforms have already moved in this direction. The AJ Bell Investcentre custody charge is already capped, with tiered fees until a £2m threshold, after which additional fees are scrapped.
AJ Bell marketing director Bill Mackay said that the company aims to “charge appropriately for the work involved and any risk to the business from a given case”.
Such a charging structure has been criticised as a way of cross subsidising the business, so that smaller clients pay the bulk of fees while larger clients get a discount.
But Mr Mackay said that most clients do not exceed the threshold, and even those that do pay the same amount of fees up until the point of exemption.
“As you might expect the number of customers with funds of this size are relatively small when compared to the total number we attract across the year. This taken alongside the charges collected on the funds up to this tier means that there is very little risk of cross subsidisation.”
Mr Polson said that cross subsidisation is “less of a risk”, and that large clients currently subsidise small clients as it doesn’t cost significantly more to administer a million pound portfolio than one worth a few thousand pounds.
“Reduce the overall charges for the fatties; reduce the cross-subsidisation,” Mr Polson said.
The unfavourable fee structure is often the reason why large clients forego using platforms for investing, and so by introducing a fee cap platforms can lure investors to put more money into their products.
Mr Polson said: “Platforms are used less frequently than you’d think for very large portfolios; this is one of the reasons why.”
julia.faurschou@ft.com
