The platform puzzle: Are in-house funds and models a conflict?

Platforms have brushed aside concerns that running their own funds and model portfolios could lead to conflicts of interest, saying they have the safeguards in place to prevent such issues arising.

As submissions to the FCA’s probe into the market have now closed, Money Marketing asks if more attention should have been turned to flows moving through platforms’ own investments and asks how much responsibility rests with advisers to make sure that they are not conflicted.

Conflicts unquestioned

In its July platform market study report, the FCA examined model portfolios in terms of risk labels, finding that the risks and returns of model portfolios with similar labels are unclear. It also looked at model portfolios in the context of advisers’ centralised investment propositions and whether they, and other tools such as those carrying out bulk rebalancing, create a disincentive to advisers switching platforms.

The regulator found that in-house model portfolio investments increased from £5bn in 2011 to £37bn in 2017. The regulator says assets under advice in in-house models on adviser platforms increased 25-fold over the same period but did not give a figure in pounds.

The FCA says the range of charges for model portfolios on direct-to-consumer and adviser platforms was between 0.05 per cent and 2.5 per cent between 2012 and 2017, with an average of 0.84 per cent.

However, one area the FCA appeared not to investigate in the market study was potential conflicts of interest when it comes to platforms running model portfolios and their own funds.

Seven Investment Management is one firm that runs a platform, has its own funds, model portfolios, and its own discretionary service as well.

Intermediary head Verona Smith says 7IM does not see this as being a conflict of interest, noting that its largest platform client does not use the business’s funds, models or discretionary service.

Smith says: “On the platform we seem to be supporting a lot of firms that have their own discretionary permissions. The reason they choose us is because of our functionality.”

Money Marketing’s leading coverage of the platform market

AJ Bell is another firm that offers services across the different parts of the value chain. Last year, AJ Bell launched its first in-house fund range with a suite of five risk-targeted passive funds. The year before, it launched a model portfolio service.

AJ Bell Investments managing director Kevin Doran says its platform has a charge of 20 basis points and its model portfolios are priced at 15bps. He says that the charge is around half the cost of most other providers in the market.

Doran says: “The overriding principle at AJ Bell is that each part of the business needs to stand on its own two feet. We don’t do any cross-subsidisation. Our model portfolios are charged at 15bps regardless.”

However, he adds there are others in the market who will give a discount on the platform fee if you use their model portfolios.

He says: “If you just build the product and make sure it is competitively priced on an individual basis that ought to be the best way to allow the adviser to choose how they want to run their business.”

Vertically integrated firm True Potential, which was put up for sale in September, also dismisses any concerns about any potential conflicts of interest. In 2017, True Potential attracted £3.8bn of assets into its in-house funds, an increase from £1.7bn the previous year. It also grew assets in its model portfolios by £2.1bn last year.

True Potential senior partner Mark Henderson says: “True Potential Investments has a conflicts of interest policy covering all products and services offered by the firm. We launched our platform in 2011, followed by our pension in 2013 followed by our funds and portfolios in 2015. We have been reducing the cost paid by the client throughout.”

Henderson says the firm’s portfolios have seen charges fall by between 10 per cent and 16 per cent through the introduction of new True Potential Investments funds. He says there is no discretionary fund management fee charged for portfolios or on its personal pension.

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