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Mark Polson: Unsticking the stuck on platform transfers

The higher the velocity of money moving round the sector, the greater the competition and better benefits to clients

If you took the time to read the Investment Platforms Market Study (and I realise that is a big if), you will know the FCA thinks the sector is not doing too badly in general. Perhaps even a little better than that.

But one thing it has not nailed is getting platform-to-platform transfers sorted out.

The market study had a couple of remedies in mind for this, which conflated direct and advised platforms in a way that was not all that helpful. Exit fees and automated super clean share class conversions were mentioned but, while that will help, it will not do much for advisers.

We have been working on some research on the transfer market and considering what we can do to increase the velocity of money moving around the sector – unsticking the things that are stuck. The higher the velocity of money, the greater the competition and the better potential benefit to end clients. Which is sort of the point.

Anyway, we ran a survey with 95 advice firms and got some interesting results. About two thirds said they had felt constrained from recommending a transfer when they thought it was probably in the client’s best interest. That is a sad state of affairs.

The main constraints mentioned had to do with cost and complexity of transfer. Nearly 60 per cent of firms said it was just too expensive from an admin point of view to recommend transfers for what they saw as a sometimes marginal benefit. About 40 per cent said they also had issues with important information (principally book cost and transaction histories) not coming over in transfer cases.

The hope with the platform market study was that there might be some kind of regulatory dividend for platform-to-platform transfers, but that did not happen.

Suitability remains absolute and is, of course, baked into Prod and Cobs. This has led many firms to take clients moving from platform to platform through a full, from-the-ground-up advice process.

The FCA’s interim platform market study report suggested the median administrative cost of a transfer was £700 (ranging from £150 to £1,835) and took up to 15 hours of work, based on feedback from 36 firms.

Our survey came up with a higher figure of £1,155 and up to 20 hours of work per case. The difference between the two is down to different methodologies in the main and need not detain us – but the key thing is that it is too much.

Interestingly, though, the platform market study quotes a bit of Mifid: “Article 54(1) of Mifid Org Reg provides that: ‘Where an investment firm provides a service that involves periodic suitability assessments and reports, the subsequent reports after the initial service is established may only cover changes in the services or instruments involved and/or the circumstances of the client and may not need to repeat all the details of the first report.’

“Esma guidelines state that: ‘The principle of proportionality in Mifid allows firms to collect the level of information proportionate to the products and services they offer, or on which the client requests specific investment advice or portfolio management services.’”

We have heard firms’ frustrations loud and clear that having to do “full suitability” for transfer business is a major factor in whether to recommend one.

However, this suggests going back to the start and doing a major review is not necessarily essential, unless there have been major changes to the client’s circumstances, which planners providing ongoing service would know anyway.

It may be the case that compliance teams are being (understandably) overzealous in their process for risk management purposes. We think it is possible to create a streamlined advice process that satisfies regulatory requirements and controls risk for businesses, is understandable for clients and cost-effective for everyone involved.

The truth is every participant in transfers needs to work on process. It probably doesn’t take 15 or 20 hours to get one done if everyone is on their game. Three to four hours might be more like it. And that would be easily tuckable inside the 0.8 per cent, which is near enough the mode ongoing adviser charge.

In one of its more waspish moments, the market study hints at this: “If ongoing advice charges do not cover the costs of assessing the benefits of switching, advisers need to be able to justify this.” The FCA has a point.

So, the platform market study did not change the regulatory world, or even shake it that much. But, in its defence, it points (frequently) to Prod, Mifid II, Cobs and the rest, which state advisers should recommend transfers where it is in a client’s best interest – not where the admin is something they can stomach, or where the client is lumpy enough for the exercise to wash its face. Most suitability exercises will identify a few platforms suitable for a client. Within that, there will be a spread of prices. That is an important distinction – price is not the same as suitability; something cheap and unsuitable is still unsuitable.

But of the suitable cohort, there is an argument that you would have to work very hard to defend why your client is not in the lowest priced.

None of this is easy, and real life is not naturally reflected in the pages of a market study, or the lines of a column like this one. But we do have some emerging issues here: the regs are the regs and the sector needs to do more to help advisers meet them in an economic way.

Mark Polson is principal at The Lang Cat


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Good analysis and conclusions Mark. In the end though, as I think you imply, the cost of providing the required analysis and execution (including book costs) needs to be sufficiently low to enable this to happen the way it should! This is down to the platforms and the transfer software providers.

  2. I sometimes feel that there is too much focus on short-term cost instead of looking at long-term benefits and profitability.
    We completed a major platform review last year and are now implementing the results.
    In almost all cases we are choosing not to charge the client for this work and accounting for the cost within our annual servicing fee.
    This does mean a short-term hit to our profitability in some cases, but the end result is that clients are in the right solution going forward and in many instances are paying lower fees.
    Longer-term it will also benefit us as a business, as we are confident the new solutions (we do not have one single solution) will lead to more efficient servicing, lower wasted time and costs from us, and so greater long-term profitability.
    We are planning for and advising clients on long-term solutions – why is so much of the profession unable to take the same long-term view on this and focused on short-term costs instead?

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