Investment Platforms Market Study – Some Thoughts
Mickey Morrissey, head of distribution, Smith & Williamson
If you fill a room with 50 financial advisers and ask them how many use platforms for their clients the majority will always put their hands up. If you then ask how many have issues or problems with the platform they use the majority will also put their hands up.
Platforms have become a way of life in the adviser, and consumer, market since Cofunds and Fidelity launched their platforms almost 20 years ago. They provide an invaluable service to advisers, clients and more latterly discretionary wealth managers (DFMs), such as Smith & Williamson. However, there is little doubt that they all have ‘issues’ to contend with and the spotlight is firmly on them with theFor those of you who have not read the 109 page document I trust the following might be helpful and not a little contentious.
According to the paper the platform service provider market has doubled since 2013 from £250bn to £500bn assets under administration (AUA). There are over 40 platforms in the market and what they offer advisers and consumers varies significantly. The adviser platform market has in excess of £311bn AUA and although it is dominated by a handful of platforms none of the top four have over 20% market share.
The paper has raised several important issues but I wish to highlight five that can affect advisers and DFMs alike.
- Switching between platforms can be difficult
- The risks and expected returns of model portfolios with similar risk labels are unclear.
- ‘Orphan clients’.
- Levels of transparency on fees and charges.
- Potential areas of non-compliance with existing rules.
Platform providers often have teams in place to assist migration or bulk switching but even so a quarter of advisers who were surveyed said it was difficult or very difficult to switch from one platform to another. Almost half of the advisers when questioned said they were likely to charge clients an extra fee for switching on top of their ongoing advice fee. It must be remembered, however, that advisers need to complete lengthy reports to clients on why they are making the recommendation in the first place.
The report found that the information platforms provide about similarly labelled model portfolios makes comparison difficult. These model portfolios expose investors to very different underlying assets and volatility in returns. Different labels are applied to explain the risk categories of the model portfolios, for example, ‘Cautious’, ‘Balanced’, ‘Low risk’ or ‘Adventurous’, Aggressive’ and ‘High risk’.
The FCA estimates that there are currently just over 400,000 orphan clients with just over £10bn of assets on platforms. These clients have a limited ability to access and alter their investments on an adviser platform and so are paying for a function that they cannot use. Worse still some adviser platforms impose extra platform fees on orphan clients, of up to 0.5%, and with one exception platforms do not actively monitor whether there has been activity on accounts with ongoing advice charges.
The FCA reviewed 25 platforms to gauge the level of platform pricing complexity. Unsurprisingly they found that platform pricing is complex and the differences across platforms makes comparison of charges and fees difficult. Although half of the adviser platforms reviewed offered a number of fees ranging from 1 to7, the other half was between 15 and35.
The report highlights that some advisers use services including the provision of education and training courses, white labelling, and bulk rebalancing and model portfolio management tools which could benefit advisers but not necessarily their clients. Some of these services could be caught up in the inducement rules. The FCA recommends that when considering which services to receive from platforms, advisers should ensure that they are compliant with the non-monetary benefit rules.
I have always believed that we should work in partnership with our platform providers, particularly those that offer our Managed Portfolio Service. Unusually the models we manage contain investment companies and ETFs, as well as open ended funds, so it is important that we have the confidence in the capability of the platforms we partner with. If the administration goes wrong it will inevitably reflect on the manufacturer, which in this case is us.
I have highlighted a few of the issues and concerns raised by the report, although there are many advantages of using platforms and most of them provide a really good service. We have come a long way in the past 20 years and it is difficult to imagine how we would have coped without them.
Mickey Morrissey, head of distribution, Smith & Williamson
Source – FCA – Market Study MS17/1.2
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back, in total, the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.
Note to editors
Smith & Williamson is an independently owned financial and professional services group. The firm is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices, entrepreneurs and mid-to-large corporates. The group’s c1,700 people operate from a network of twelve offices: London, Belfast, Birmingham, Bristol, Cheltenham, Dublin (City and Sandyford), Glasgow, Guildford, Jersey, Salisbury and Southampton.
Smith & Williamson Investment Management LLP is part of the Smith & Williamson group.
Smith & Williamson Investment Management LLP
Authorised and regulated by the Financial Conduct Authority
Smith & Williamson Investment Services Limited
Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority