Here’s a question. What’s the purpose of an investment platform? I don’t mean how you define a platform – there are plenty of ways of doing that – but rather, what is a platform’s everyday purpose?
You might say, for example, that it is to facilitate access to a very wide range of assets that your client might need at some point – but most advisers’ centralised investment propositions use a relatively constrained universe of funds and few use exchange traded assets.
Or you might say that it is to facilitate access to a very wide range of tax wrappers that your client might need at some point – but well over 90 per cent of platform assets are in a pension, Isa or general investment account.
Or you might say that it is to improve the administration experience for clients.
Or you might say that it is to help them escape the clutches of the evil life companies – although the two fastest-growing platforms of last year were Standard Life and Aviva.
To my mind there is an awful lot of unfinished business after the FCA’s asset management market study. Whatever your answer, it’s about to come under renewed scrutiny as part of the FCA’s platform market study.
The FCA has a few stated aims for this study, which I’ll paraphrase for space (you can read the full thing on the regulator’s website) and to which I’m going to add a few that they are a bit less noisy about:
• Barriers to entry and expansion – are smaller firms or new start-ups getting muscled out? With recent new or newish offerings from Hubwise and Embark, this is hard to argue.
• Commercial relationships – are the decks being tilted? And what about Superclean™ share classes? A load of rubbish or what?
• Business models and profitability – how come no one’s making any money then?
• Adviser impact – are platforms competing in the interest of the client, or just making ‘nicey-nicey’ to adviser firms? Are advisers negotiating hard enough?
• Customer behaviour – has anyone asked the poor sods whose money it is?
On top of that, here are the ones that aren’t written down, but which I suspect are going to be important:
• Vertical integration – how come most firms who are acquired end up writing more expensive business post acquisition?
• Centralised investment propositions – what are they doing and could we all have just have piled into a cheap passive multi-asset fund?
• Total cost of ownership – would Mrs McGlinchy have been as well served with the money under the mattress after all?
To my mind there is an awful lot of unfinished business after the FCA’s asset management market study.
The interim report was a sight to behold – swashbuckling, fierce and great fun. Its final report was ‘half-a-loaf’ and distinctly lacklustre. Such is the power of lobbying, I guess.
Specifically, I get the sense that the platform market study will go after the expensive end of the vertical integration market.
Platform data request
If I were a platform, or a restricted advice firm that depended for its coin upon acquired advisers putting assets on a fully priced platform, with relatively high adviser fees, and into multi-asset funds with an ongoing charges figure of 2 per cent, then I’d be having some meetings right about now.
My basis for this is the data request the regulator has put into the platforms. It’s a huge beast, and platforms have already kicked back against it with some success. But at its heart is a full historical picture of the assets advisers and clients have used over time and what it has done for the client in terms of outcomes.
The temptation is to say that, with potentially millions of data points coming at them, the FCA won’t know what’s hit it and won’t be able to make any coherent findings from what it gets.
I’m not so sure. Big data processing isn’t beyond the wit of man, or even regulator, these days and I doubt very much that a big Excel spreadsheet is the end point of this analysis.
More profoundly, though, I don’t think this data request is exploratory. I think the FCA knows exactly what it’s going after.
You think it doesn’t know which firm has been acquired by which consolidator and when? You think it doesn’t know which firms have a total cost of ownership for the client that is well above 2 per cent?
I think our regulatory friends are after proof of patterns it thinks it knows exist already.
If those firms who think they may have a problem with this are smart, they’ll take action to suppress the overall total cost of ownership of their ‘solutions’ before it’s done for them.
If I were a betting type of cat, I’d say we’re in for a sustained period of price cutting: both on platforms and, more importantly, in the multi-asset space.
We’ve already seen Standard Life Investments trim the price on some MyFolio offerings. These were far from the most pricey options in the space anyway, but I can’t help thinking there’s some pre-empting going on.
In terms of the impact on non-consolidated firms, I think the question I posed at the top of this column is going to be a really important one.
I’d suggest that each firm sets an hour aside at its next board or management meeting to go back to first principles and ask why a platform is suitable for their clients. Then really question those choices. For example, if you are using something straightforward like Vanguard LifeStrategy for a client’s Isa and holding it on a platform charging 0.35 per cent, then why aren’t you holding it on Vanguard’s own platform at 0.15 per cent? The lack of adviser charging on Vanguard’s offering is unlikely to be an acceptable answer.
The FCA isn’t a price regulator. It just behaves like one.
Self-defeating transactions
The big question really is who you are inviting in to set up camp on your client’s fund, and how big a slice they are taking. What you are looking for is ‘self-defeating transactions’ and you can find some guidance in section 6 of the FCA’s Conduct of Business Sourcebook:
“In order to meet its responsibilities under the client’s best interests rule and principle 6 (customers’ interests), a firm should consider whether the personal recommendation is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account.”
That is to say, if your predicted long-term equity performance is, say, 4 per cent – we are starting to see some forecasts drop to this for balanced portfolios – and your charges are 2.2 per cent, there are some fundamental issues to address.
The answers to these are yours and yours alone. But if you have been putting off a root-and-branch due diligence check on your platform business, now wouldn’t be a bad time to progress.
Make sure to start with the fundamental question – what is the purpose, in your business and for your clients, of an investment platform?
Mark Polson is principal of platform and specialist consultancy the Lang Cat
