I have read numerous articles which suggest there is a widely held belief that advisers should pay for platforms, as it is they that benefit.
On this I could not disagree more.
While I am in total agreement that advisers do benefit from platform use, (although some advisers may disagree with this currently, given the numerous recent re-platforming debacles) the benefits advisers derive pales in comparison to the degree in which the client benefits.
This view was initially inspired by an adviser throwing down the gauntlet – “you demonstrate that my client is financially better off (in hard money) by using a platform and we will start using one”.
With the incessant focus on price often at the expense of value, we have translated certain platform benefits, such as discounted share classes and tax leakage mitigation, into what would effectively be an unnecessary client charge without the prerequisite platform technology.
The FCA has been clear that one should start with the client proposition first and then pick the platform that best enables delivery of it.As with many things, these are often under the water and mostly not seen until you hold your nose and put your goggles on.
Double taxation on accumulation units
Without sophisticated notional distribution functionality there is a very high degree of probability that the client pays both income tax at the marginal rate (no choice here) and, worryingly, Capital Gains Tax, flying in the face of the tax principle that you only tax the same money once.
We have looked at a number of model portfolios and if your chosen platform administrator does not offer the requisite tool, the cost to the client can range between 67 basis points (bps) to 114bps per annum.
Pre-funding of pension tax relief mitigates considerable tax drag – as the average waiting time to receive tax relief can be as much as eight weeks. The potential cost to the investor of this delay is around 300bps per annum on a monthly contribution of £1,000.
This reduces to 36bps per annum if the client has a fund value of £100,000. We have assumed an annual growth rate of 6 per cent.
Phased drawdown functionality enables clients in decumulation to withdraw income and capital in the most tax efficient way.
Flexi Isa – anybody that needs cash usually needs it urgently. Knowing you have access to your capital without wiping out your accumulated tax allowance provides peace of mind and significant savings.
Current rates are 5 to 6 per cent per annum in bank charges for short-term finance.
Platform technology can also enable access to investments that qualify for business property relief. This has the benefit of providing a tax saving of 40 per cent on inheritance tax, which can be particularly relevant for aging Isa investors.
Exchange-traded funds (ETFs) are becoming more widely used by advisers and DFMs.
It is vital that the platform enables rather than constrains access to these. In offering efficient access to a wide range of instruments this enables the deployment of money managers’ best thinking as they would not be forced into using substitute investment vehicles.
If ETFs are the preferred solution, it is vital that aggregated and fractional trading is available. Without this platform functionality, any cost savings are lost in individual transactional costs and due to the high nominal value of each ETF, clients are likely to suffer cash drag as only whole shares can be purchased in the absence of fractional trading.
The FCA has been clear that one should start with the client proposition first and then pick the platform that best enables delivery of it.
If these are important benefits to the investor then client-centric platforms are a must-have and well worth paying for. Given the thousands of basis points saved by clients through well thought through platform technology anything under 50bps platform charge represents excellent value for money to the client.
There are a number of roles that a platform fulfils that require significant sums of money.
These include responsibilities around being a custodian and Sipp trustee, as well as the operation of tax wrappers, including all the complexities around being a Sipp provider. These can be all-too-often overlooked.
Paul Boston is director of sales at Novia
