I have been thinking about sticks and carrots of late and which of them will be more effective in platformland as we move towards the retail distribution review. If there is one part of the industry that should be filling our regulator with a sense of calm pleasure, it should be wrap usage, where charges are transparent, bias is removed and commission is a thing of the past.
But this is not happening. Platform adoption continues to increase and it appears now that something like half of all investments in January of this year went on to what we would term true wraps – unbundled, transparent platforms. Isa season will probably put that back a bit until the summer but it is an interesting trend. Despite this, my overriding sense as I read the various areas of focus from FSA is that the reverse is true and it is disturbed by this trend.
There is a compelling argument for advisers to use wrap technology as what Veracity’s John Baxter calls an “accelerant” towards a sustainable, profitable business model. It is in clients’ interests for their adviser to be profitable – that is how they can be confident they will be around to advise them in future.
But is there genuine client advantage in using wraps? Are they broadly non-toxic or is there potential for genuine client detriment?
Many people agree wraps are no more than plumbing – a way of hosting advisers’ own investment propositions that enables advice to be delivered cleanly and portfolios run efficiently. They are not products in the packaged sense but are regulated as if they were, hence the regulatory focus on whether off-platform tax wrappers may offer better value for clients.
This focus on tax wrappers feels retrograde. Perhaps the focus should be more on the investment processes hosted on these platforms rather than whether one product is available for five basis points less somewhere else.
The thing that drove it home for me was when I was re-reading our old friend CP10/29 recently, in particular, the bit on cash rebates. The debates about investor confusion, proliferation of share classes and all that kind of thing are now well worn but the point we need to come back to is that our regulator in 2010/11 thinks advisers will use the rebates from fund managers to chisel greater remuneration out of investors.
That is a pretty telling thought process and does not augur well. Part of its genesis is from CP 10/14, the platform thematic review, where a high proportion of advice on platforms was found to be unsuitable or impenetrable.
The heart of it goes way back to Callum McCarthy’s famous speech at Gleneagles in 2006, where he said: “The present system, with its inbuilt encouragement to churn and its product and provider bias, is not one that is naturally robust to claims for misselling and the associated compensation liabilities. I note that as at May 2006, the top 21 IFAs had turnover of £640m but operating losses of £22m – twice that of a year earlier.”
We have come a long way since those days. Or have we?
Mark Polson is principal of The Lang Cat