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Flexing their muscles? FCA challenges platforms on their buying power

Regulator pushes on fund fee discounts but platforms argue this is the wrong focus

Platforms have questioned the FCA’s focus on discounts on fund fees as the regulator zeroes in on platform buying power.

The FCA released the terms of reference for its platforms market study earlier this week, citing negotiations on charges as a focus of its investigation.

Money Marketing has analysed the adviser platform market to find out who agrees deals with fund groups, what impact this is having on price and the role advisers play in pricing negotiations.

Competitive prices

In the asset management market study interim and final reports, the FCA flagged its interest in retail platforms securing discounts on fund charges.

The final report, released in June, reiterated the interim report findings that the practice of securing discounts on funds did not appear to be widespread and that it was not clear retail investors benefit fully from the potential buying power available to platforms. In the platform market study, the FCA is seeking to find out if platforms are “able and willing” to negotiate a competitive price on investment charges.

It says: “We will assess the ability of platforms to negotiate on upstream investment charges by comparing how different funds are priced on different platforms and other distribution channels. This will include taking into account the cost of the platform and the overall investment cost relative to other distribution channels.”

Platforum head Heather Hopkins is concerned about the continued focus on platforms negotiating prices with asset managers. She says: “Some platforms have buying power but many don’t influence flows, so will struggle to perform this function.”

Who negotiates? 

Money Marketing asked adviser platforms if they negotiate deals on funds, the proportion of funds they negotiate discounts on and the range of discounts they have agreed.

Fourteen out of the 16 platforms that were approached for comment responded.

Three platforms – Standard Life, FundsNetwork and Zurich – provided specific responses outlining the number of funds that are discounted. Parmenion and Raymond James declined to comment.

A Standard Life spokeswoman says there are more than 440 discounted share classes from 15 fund managers across Standard Life Wrap and Elevate, with discounted funds accounting for 26 per cent of platform assets under management.

Discounted share classes account for about 15 per cent of the total number of tradeable share classes on the platforms. The spokeswoman says the average saving compared with clean share class funds is 10 basis points. However, on individual funds, the discounts range from five basis points to 25 basis points when compared with a standard clean share class.

Zurich has around 200 funds with fees below the typical 0.75 per cent “clean” charge, out of a range of 3,000 funds. It offers these funds from 10 alternative fund groups.

You cannot focus on fees and ignore the wider concept of performance and gains

Fidelity FundsNetwork says the range of discounts it negotiates is between 3.5 and 50 basis points. The platform has negotiated discounts for about 400 share classes from more than 30 fund providers.

Old Mutual Wealth says it looks to negotiate deals on all funds. A spokesman says discounts vary but a typical discount is 10 per cent.

The Lang Cat consulting director Mike Barrett says research conducted by the agency six months ago showed the average discount across platforms was seven basis points.

Barrett says: “Even if you are just buying one fund, the discount is likely to be very low and a lot of consumers will buy a portfolio where the level of the discount is diluted.

“For most of the discount funds, bearing in mind it is only seven or eight basis points if you are getting the discount, you are often better off buying the non-discounted version of the fund on a cheaper platform.”

Fundscape chief executive Bella Caridade-Ferreira agrees the discounts do not make a huge difference to what a client pays. She says: “The focus is on fees – the FCA seems to be saying platforms should negotiate better discounts – but you can’t focus on fees and ignore the wider concept of performance and gains. You could be in a really good fund that you pay a bit more for and over the years the gains are going to be substantial and therefore it’s been a good reason to be in that fund.”

From AJ Bell to Aviva: What platforms say about discount deals

Barrett adds: “We question if it is worth it. All of the complexity and all of the potential for bias in the fund selection, all of the operational issues of processing different share classes – if the customer is not actually going to benefit, then would the industry and customers be better off not having discounts and operating a completely transparent, level playing field where everyone can see what is going on?”

Adviser buying power

Several platforms, including Seven Investment Management and Ascentric, say they do not negotiate deals but they will add preferential share classes advisers or discretionary fund managers might have arranged with fund groups onto the platform. 7IM platform head Verona Smith says: “If a particular advice firm or discretionary manager negotiates deals for their underlying clients we can restrict these fund deals to their clients or model portfolios.”

Platform bosses say fund managers offer deals to advice firms, which control the flow of assets, rather than custody-only platforms.

Transact chief executive Ian Taylor says: “Platforms do not control which fund managers receive the money that goes onto them. Those decisions are made by advisers or by the clients themselves.

“As such, while there are a few additional discounts available beyond the general 0.75 per cent, these are often for in-house funds or vertically integrated advisers. We have a few but the majority of funds bought on Transact are already at the lower end of the charging scale.”

Taylor says the practice of fund groups offering special share classes or rebates to advisers is not common, simply because many advice firms do not have enough scale.

Barrett agrees questioning if even the platforms have enough scale to influence large fund groups.

He says: “Advisers can influence it but they are still on the hook for suitability so there is only so far they can influence it. Adviser firms don’t have enough AUA to interest the fund groups to start discounting their products.”

Novia chief executive Bill Vasilieff adds: “The whole idea of ‘superclean’ share classes, which meant giving discounts to platforms, hasn’t happened. There are very few deals given. Platforms cannot direct the flow of assets, they are just there for administration.

“The decision of where the assets go is down to a DFM or an adviser so fund managers are very reluctant to give blanket deals to platforms because all they are doing is reducing the price.”

Adviser views

Peter Chadborn
Director
Plan Money

It doesn’t surprise me that discussions between fund groups and advisers are going on because it is all about getting a competitive advantage. I haven’t got a problem with it provided it is completely transparent. Those deals will favour networks and DFMs but your average adviser would not get a look in. It makes it less appealing from our point of view because firms like ours do not have that kind of scale.

Justin Modray
Director
Candid Financial Advice director

Experience to date suggests advisers are probably more likely to negotiate deals for themselves than for their clients. Money Marketing reported in April that Chase de Vere had negotiated a discount with Cofunds which it effectively kept for itself rather than pass on to clients. I’d like to see the FCA outlaw all such arrangements between platforms and advisers. If an adviser can use its clout to negotiate, all savings should be passed on to clients.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Having frittered away £60,000 on a bit of highly questionable tinkering with its logo, it looks as if the FCA made precious little, if any, effort to apply any “buying power” in its dealings with Saatchi & Saatchi. In all probability, the job wasn’t even subjected to any sort of competitive tendering process. We’re the FCA so we’ll go straight to the “best”, never mind what it costs.

    Andrew Bailey may have a lot on his plate to sort out but, so far, fiscal responsibility on the part of how the FCA spends OPM doesn’t seem to have made its way onto his agenda.

  2. The FCA is fond of applying the principle of cost/benefit analysis, but the indications here suggest that any consumer gains emerging from this exercise will be at best marginal.

    • Julian Stevens 21st July 2017 at 1:03 pm

      When was the last time the FCA commissioned or undertook a Cost:Benefits Analysis on ANY of its own projects (least of all the RDR)? Cost:Benefits Analyses are strictly for the regulated, not the regulator (Do as we say, not as we do. We’re free to spend your money in any way we want).

      That aside, I’d be mildly interested to know the criteria compelling any investment firm or platform to submit to being regulated. Presumably, any presently unregulated investment manager could apply to become regulated. What barriers are there to presently regulated investment managers (or platforms) withdrawing from being regulated?

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