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A bundle of platform problems

Harry Katz, principal of Norwest Consultants, urges the regulator not to land the platform sector with complex requirements

As we evidently don’t have enough to agonise or worry about, we have now to justify (or at least be prepared to justify) to the regulator why we use the platform or platforms we do.

Moreover, in order to appear whiter than white, one gets the distinct impression that the regulator would not be too impressed if we only used one platform.

Then, of course, we would, it seems, have to justify the costs of the platform. This, I would have thought, is the least difficult. I can well recall the time and effort needed to value a client portfolio before platforms existed. Not too hard for accumulation funds but, for income funds with income being reinvested, each fund manager had to be rung up in order to ascertain the correct current number of units. Therefore, £750 per valuation (for example) makes the use of a platform (any platform) look like the bargain of the year.

We then have to turn our attention to the question of bundled or unbundled.

First of all, I think it is just as well to define what these terms mean. Bundled, I believe, means that the platform provider negotiates with the fund managers to include their funds on the platform for which the platform is able to negotiate (in the majority of cases) a discount on the fund management fee.

This would seem an obvious move as it patently has benefits for both parties. The fund manager has less strain on his call centre, less need for paperwork and generally less administration – and this saving (or some of it) is passed across. The saving itself might not be passed through to the client – that is admitted.

Unbundled means that there is no negotiation (in general) with the product provider and that the intermediary is free to go absolutely anywhere to choose anybody’s fund and put it on the platform (or wrap as they like to be called). On occasion, this may result in a discount but it is not a foregone conclusion. There are opportunities for the providers to save money but it is not quite as implicit.

So what do we have proposed for unbundling? We have the bleating that we need different share classes, which I think is nonsense.

If we take the current system, let us say, for example, £1,000 invested. This amount suffers deductions for the adviser remuneration (if any via this route) and for the fund management fees.

Has it escaped everybody’s attention that all the client really wants to know is how much in total it is going to cost him to deal? Who gets what, as far as the client is concerned, is really not of paramount importance

Of the fund management fees, as already stated, the platform takes a slice as its turn, so the client ends up with a net invested amount of let us say £950. Therefore, it is perfectly apparent that the up-front charge is £50 or 5 per cent.

On an ongoing basis, taking the same criteria into consideration, the RIY or TER (when stated) is, say, 1.5 per cent, of which the adviser receives (say) 0.5 per cent trail.

Alternatively, the adviser charges a fee. The fee is less (say) than the cost of 3 per cent commission, so the net invested amount becomes, say, £990, so the product up-front charge is 1 per cent or £10.

However, the adviser has charged, say, £20, which the client pays by cheque. An honest adviser will send a note with the contract, explaining that the acquisition has been 1.0 per cent for the product with any residue being invested for the client’s advantage but there is a further 2 per cent for the adviser (charged as a fee), making the total acquisition cost 3 per cent.

As far as ongoing trail is concerned, if this is not paid by the provider, then a charge, say half annually in arrears is invoiced to the client by the adviser. This may then result in a lower RIY (or TER) but a charge of, say, 0.5 per cent has still been made, so, in effect, the client is not necessarily any better off.

If the trail is not taken from the product (but this is still presumably an option under CAR) then money can be deposited on the platform in cash awaiting investment or there can be a standing investment instruction, say, as soon as £25 is accumulated it is invested in fund X on the platform.

Has it escaped everybody’s attention that all the client really wants to know is how much in total it is going to cost him to deal? Who gets what, as far as the client is concerned, is really not of paramount importance

I know this is a crude explanation and it is not meant to be a final definitive solution but it is merely meant to illustrate that it really is not necessary to impose huge extra costs on to the fund management industry by creating additional share classes and further needless complication.

Let us then examine the unbundled alternative. If we unbundle, we can then tell the client in detail that the fund manager gets £x, the platform gets £y, the adviser gets £z and create a complete tariff with which most clients will struggle, if not lose the will to live before they get to the bottom of the page.

Has it escaped everybody’s attention that all the client really wants to know is how much in total it is going to cost him to deal? Who gets what, as far as the client is concerned, is really not of paramount importance.

If we have an unbundled platform, will the client be able to access the funds as (or more) cheaply as he could have done via a cost-effective adviser and with the platform negotiating discounts?

An unbundled platform has to charge explicitly for its service. Is this likely to be cheaper than the (hidden) bundled charge? Where is the client better off?

Yes, it is now implicit the client can see how much the platform charges but who cares? What we have to look at is the bottom line. You have £1,000 invested, how much goes into the investment? The difference is the charge. Does that have to be rocket science?

If advisers cannot work it out for their clients, then maybe QCA evel four is not high enough and we need level 24.

If the regulator cannot see the sense and that, on occasion, interference in the market has unintended, unwanted consequences, then perhaps they too should go back to the drawing board.

I have no illusions that there will not be squeals of indignation and outrage from the charge police who want to have a purity that often belies practicality but in the end is it beyond our wit to lay out the overall deductions clearly and do we really have to treat or clients as half-wits?


People on the move: Mortgages

Checkmate Mortgages has rebranded to Portillion and appointed new directors. Former FSA director Ronnie Baird has joined as senior non-executive director and chairman of the audit committee. He was the FSA’s director of internal audit. Philip Dearing, previously chief executive officer at Market Harborough Building Society, has been appointed savings director, Gerald Gregory, previously a […]


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