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Do conflicts cloud platform share schemes?

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True Potential’s new share deal for advisers has reignited debate on the potential conflicts of interest that have to be managed as part of such arrangements.

TP’s share plan will give advisers an escalating level of shares depending on the amount of assets placed on the platform by February 2013, with a 50 per cent uplift on assets placed by March 20, 2012. The deal will be backdated to take account of any assets placed on the platform since it launched in March 2011.

In its platform consultation paper from November 2010, the FSA made clear it was keeping a close eye on adviser shareownership models. It said: “We recognise there are a number of valid concerns with regard to ownership issues of advisers. We expect firms to take steps to manage this conflict and this will be an area we will continue to monitor closely.”

Speaking at an event in October, FSA conduct and risk division supervisor Rory Percival said the regulator was not looking to prevent such models as long as potential conflicts are managed.

But he did highlight that some white-labelled arrangements were unlikely to be allowed when the adviser-charging rules come into force next year. He said: “The rules clearly prevent an advisory firm white-labelling a platform and sharing revenues generated through advised business being placed on the platform. I make this point very clearly as we see firms introducing revenue-sharing arrangements now that apparently will be in breach of adviser-charging rules in 2013.”

Threesixty managing director Phil Young says: “I think the conflict of interest is there for people to see with deals like this from True Potential and it may well be the regulator looks across them and stops it for everybody because of that.”

But True Potential senior partner Daniel Harrison (pictured) says there is nothing wrong with advisers being part of a partnership model which includes share incentives. He says: “True Potential LLP has had a value-sharing scheme since it began business. All we have done lately is extend the scheme and given it a renewed focus. If people want to use a partnership model to create value for clients, then they need to be aware of any potential conflict of interest issue that may arise and manage it.”

Platforms such as Ascentric, Transact and Novia all had adviser share schemes at launch to encourage adviser participation.

Ascentric stopped its scheme in 2008 but between 5 and 10 per cent of the business is owned by advisers through share options. Managing director Hugo Thorman says there are no problem with schemes as long as advisers can prove they have carried out due diligence. He says: “Ascentric has offered shares to advisers in the past but stopped when the FSA began to make noises about there being conflicts of interest. The big test in the case of True Potential would be how many advisers switch assets from one platform to another and the difference in price bet-ween the old and new platform.”

Transact had a share deal when it was set up in 2000, which was brought to an end in 2008. Advisers currently hold just under 14 per cent of the company.
Managing director Ian Taylor says: “I think it is more difficult to use these shareholding deals purely because of how closely the FSA looks at conflict of interest but there is nothing to stop advisers buying shares in such firms without being awarded them.”

Novia ran a share options’ offering for advisers which lasted less than 12 months after its launch in early 2009.

Chief executive Bill Vasilieff says: “We only have between 1 and 2 per cent of the firm’s share options held by advisers. Many felt the conflict of interest was too apparent. As a firm, however, Novia did not see anything wrong with the deal as long as everything is disclosed to the client.”

Nucleus chief executive David Ferguson says share arrangements can be a sensible move for advisers looking to mitigate execution risk by investing in the platforms they use most and the schemes enable them to have a say in a platform’s direction. Nucleus is 51 per cent owned by advisers.

He says: “Given the way life companies are inclined to behave and the propensity of some participants to leave the market when they cannot make it work, it is vital that IFAs have a meaningful say in the direction of platform operators. There is only a conflict if you are of a pre-RDR mindset.”

IFA group Paradigm announced it was to become a shareholder in Nucleus in September. Nucleus currently powers Paradigm’s platform.

The Platforum managing director Holly Mackay says advisers should scrutinise the return they may get in the event of a sale after some advisers in Australia did not see the return they expected.

She says: “This model was popular in Australia but when the businesses came to be sold, there was outrage from the advisers who were unpleasantly surprised at how little the payout was, so I think the first thing to question is how much of an incentive these schemes are likely to represent.”

Platform adviser share schemes

Nucleus
Launched in 2006, around 95 firms hold the majority stake of 51 per cent in the company while Sanlam UK holds around 42 per cent. Firm is expecting to report a profit for 2012.

Ascentric
Ran shareholding deal with advisers from its inception in 2007 but ended scheme in 2008. Currently, advisers own between five and 10 per cent of the share options. Advisers who put a minimum of £1m on the platform were offered share options. Firm moved into profit in 2011.

Transact
Ran shareholding scheme for advisers placing at least £1m on the platform from launch in March 2000 until 2008, dependent on the amount invested on the platform. Currently, advisers hold 13.8 per cent of the company. Shares are non-voting. In profit since 2003. In 2008, Transact’s parent company Integrated Financial Arrangement paid a £600,000 dividend to shareholders.

Novia
Offered share options at launch in 2009, ran for less than 12 months, Novia share options held by advisers between 1 and 2 per cent. No minimum investment on to platform required. Firm went into profit in January 2011.

Paradigm
White-labels Nucleus platform and announced in September it was to become Nucleus shareholder. Firm’s shareholding is currently being drafted. Firm uses SEI to power its corporate platform.

True Potential
Looking to give advisers 10-20 per cent of firm, with advisers getting 50 per cent uplift on assets placed by March 20, providing total is over £1.2m. Those who invest after this will still get shares until February 2013.

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Readers' comments (9)

  • Some advisers are undoubtedly deluding themselves on the value of some of these offerings and are not allowing for the 'long haul' in realising value.

    Whilst there is a lot of reporting emphasis on size (assets under direction), the real measure of financial viability and success is spend relative to profit margin or potential for profit margin. It costs 25 - 30 bps to run a platform even without allowance for development and enhancement costs. So if your total charges are at this level or not much more then profit is difficult and will never amount to much of a profit margin. The most profitable Wrap, Transact, operates on a circa 20 bps profit margin and has potential to squeeze down on price - as evidenced by a series of price cuts over the years - nice position to be in. The big unknown is the 'multiple' on an IPO or trade sale. Maybe 20X is realisable - all theory until someone does it.

    I don't see much conflict of interest unless the adviser share deal is heavily geared (i.e. shares awarded increase with volume at a faster rate than the volume increase).

    In the days when Perpetual was a quoted fund manager and shares went up more often than they do now, fund manager shares were a geared play on the stock market so Perpetual shares tended to do better than any of their funds - so I bought shares and declared these to clients on the Victor Kiam principle (so impressed I bought the company). On the basis that this meant that my wealth was even more at risk than their capital, this seems to reassure rather than alarm clients.

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  • I think they have to compromise the status of an Independent firm in the sam way as DIFs. The conflict or at least its suspicion, whether disclosed or other wise will always be there.

    I suppose it's a different issue for tied firms where the client relationship is different anyway. I saw T-P's recent advertising material where they claim one of their previous scheme participants made over £1m from their scheme.

    I think one would be hard if pressed to demonstrate genuine independence and no conflict of interest when those sort of numbers are being bandied around.

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  • Spot on Duncan
    If the firms were tied there would be no problem.
    Independent Financial advisers will find it much more difficult to prove there is no conflict of interest.
    The buck stops with the adviser not True Potential.

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  • Stan,

    I think your missing the point from the regulators perspective.

    The conflict here is often a driver of unsuitable advice, and if your putting everything into one proposition out of which you may gain (be that a company, platform, OEIC, whatever) this does not guarantee it is right for the client.

    The fact you show committment and belief by putting your own money there is not really the point here.

    Its about suitablity in the face of objectivity. Can you demonstrate it was the best thing for the client, what were the other options, why were they discounted etc......

    I hold shares in Hargreaves, doesnt mean i would direct all my clients there unless i could show it was the right proposition for them. (Platform and model portfolio etc...)

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  • Interesting debate. It's difficult to see an adviser with shares in a particular platform moving assets away from that platform, as this would have a potentially detrimental effect on the share options if they were ever realised.

    Of course the defence is that a share option in a company which is losing money is worthless, and will remain so until a big deep pocketed Life Co comes riding up dressed in plate armour on its white charger and pays out millions of pounds to 'influence distribution' (or some such twaddle- maybe ask Friends Prov, Standard, Aegon etc about reasons to buy such shining lights as Sesame, Park Row etc etc). Until that day arrives, then there is not as much scoped for a potential conflict as 100% of 0 is still 0.....

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  • @Big ears

    There is a danger that regulators become so fixated on just one narrow aspect of a subject that they are in danger of throwing out the baby with the bath water. The current cash rebate ban proposal is one such.

    With the share 'incentive' debate, a well chosen wrap with a series of well chosen model portfolios, all at sensible prices, is very likely to be well suited to the majority of an adviser's clients, as that is what should drive the choice in the first place, and enables an adviser to provide a better standard of service than a 'diversified product provider' strategy (which is a really big win for clients).

    If the share deal drove the choice, then I agree it is the wrong way round.

    The fact that some share deals may have been agreed for the wrong reasons is not a reason for banning all share deals, as all commercial transactions have the potential to be damaging to somebody.

    Thus if suitability is at the core of advise and can be demonstrated, there is no conflict of interest, indeed there is a mutually beneficial alignment of interests and everybody gets a better deal.

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  • If they float, the first £100m is shared between 5 directors with the remainder then split between the everyone with some points.

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  • I was taught that if you cannot put yourself in a court or law and explain yourself, then think twice. "....yes i got shares in this platform but it didn't influence me !"

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  • @Anonymous
    Which Platform are you talking about?

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