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Abraham Okusanya: Advisers must go nowhere near platform costs

An awful lot of time is being dedicated to asking platforms to justify their existence, particularly in light of various botched re-platforming projects.

But the point gets convoluted. Alongside those who question why certain platforms exist in the first place, there is debate around who they serve and how they should be paid for more broadly. Some argue platforms exist for the benefit of the adviser, so they should pay. But this makes little sense. Will they pull the money out of thin air? Ultimately, the cost is passed to the client.

So, what the “adviser-pays” proponents are really suggesting is bundling platform charges with advice fees, lowering the bar on transparency and dialling the regulatory clock back 10 years.

Head to head: Should advisers or clients pay for platforms?

A platform is not just a piece of technology like your standard back-office system. It is a product provider holding a client’s nest egg. It has obligations in accordance with FCA and HM Revenue & Customs rules. Where a platform does get things horribly wrong, like failing to pay the client’s income on time, advisers risk being dragged with it to the Ombudsman.

Bundling costs also pull the adviser closer to the dangerous territory that is vertical integration. Why stop at platforms? Why not bundle discretionary portfolio charges in? And, while you are at it, have advisers set up their own funds, too?

They can give segregated mandates to fund houses and control how much the managers are paid. Full vertical integration would lower costs for the end client, right? Except it does not. Look at the likes of St James’s Place and Standard Life. Yes, the total cost of investing needs to come down but being able to negotiate a few basis points off the platform fee is hardly going to move the needle.

Abraham Okusanya: Small advice firms are far from dead

The fact this idea is being bandied about as innovation is telling. SEI, among others, has been pricing platforms this way for donkey’s years. Yet, I wonder why there is not a queue of adviser firms at its door? Maybe because most are simply too small to negotiate any meaningful discount. And where discount deals are offered, they tend to come with strings attached.

Anyone who thinks secret price negotiations will result in greater competition simply does not understand the free market system. We are only able to interrogate fees when we see and understand what they are. Once you take negotiations into a dark room, you open the door to all sorts of poor practices fostered by lack of transparency.

Anyway, the idea that advised platforms make too much money is ludicrous.

The pain of replatforming: Inside Aviva’s tumultuous tech upgrade

Our report on platform profitability showed that for the year ending 2016, advised platforms reported a total pre-tax loss of £74m on £1.1bn revenue. This compares with a total pre-tax loss of £19m on £1.07bn of revenue the previous year. My sense is that things have got much worse since, no thanks to the spiralling cost of re-platforming.

The idea advisers can squeeze a few more bps out of platform costs with no change in service delivery is, technically speaking, bonkers.

Abraham Okusanya is director of Finalytiq

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Nicholas Pleasure 13th June 2018 at 3:31 pm

    Wise words. Those that question the role of platforms are too young to remember portfolio management without them. A fee based adviser would be charging far more than a platform for that administrative nightmare.

    We have to remember that the basic premise of the platform was that they would do the admin instead of the fund manager and hence your investment cost is reduced. This is still the case. Buying the investment direct costs far more for a worse service.

  2. Graham Ponting 13th June 2018 at 4:15 pm

    Lucid as ever Abraham!

  3. Great article full of common sense Abraham!

  4. Some very good points Abraham but I don’t necessarily agree with everything. Adviser firms can have their own platform for lower cost. This can deliver benefits to both adviser and client. Current levels of integration are low and this drives cost and inefficiencies.
    The existing business model is far from STP! Full availability of APIs and other innovations will drive competition and lower costs.

  5. Daniel Wackett 13th June 2018 at 5:10 pm

    The FSA, as it then was, removed the option of bundled charges a long time ago to ensure that advice, fund management and administration could be kept separate and explicit charges shown for each. Given the introduction of the charging disclosure requirements under MiFID II, how can bundling be thought the best way forward or even possible?

    We have only ever used platforms that disclosed their charges and would have serious concerns if any other course of action was proposed, to the likely extent of transferring clients elsewhere.

  6. You must do as you wish Daniel. I don’t think your existing platform will wish to adopt this model so I think you are safe. The the rules do however allow the platform to be ‘owned’ by the adviser. Advisers do not disclose the cost of their back office. Stockbrokers do not disclose the cost of their systems which provide a platform inter alia.

  7. Platform profitability (or lack of) is very closely correlated to how sensible the individuals running a platform are. Those with strong IT and/or business backgrounds generally seem to prosper, while the others lose money hand over fist. I sense the platform industry losing money (on average) is down to poor management, not platforms fundamentally being too cheap.

  8. Yes I concur with Hugo re this. Abraham certainly makes some valid points, but a dogmatic, evangelical approach with use of such words as ‘must’ & ‘bonkers’ does not really allow for a reasoned debate on the subject matter. Put bluntly, if you are able to deliver to a client a proposition that says client pays 1% max (may tier down) for ongoing adviser charge, dfm & platform, then that seems like pretty good value in the current market. In the main, clients tend to be concerned with their totality of costs as opposed to each discrete bit (even though,of course, each discrete bit should be disclosed IMHO). So, in essence, if you are able to influence the end consumer price because as an advisory firm you have scale, what’s so wrong with that?

  9. Here’s a little grenade…

    If you look at the triumvirate of advisers, platforms and providers and how much of the overall costs each is responsible for I suspect platforms are low on costs and high on value as it stands when you consider the alternatives.

    Another way of looking at value for money within the chain is to compare the rewards to the risks (both business and regulatory). That’s probably quite skewed too and on that basis advisers are grossly underpaid when looking at the overall costs.

    Abraham has pointed out the profit level (or lack of) in platforms. Take that a stage further and ask where the profit in the chain is going, advisers or product providers? If you’re going to look at value it seems churlish to start anywhere other than where the profit is being made.

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