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The future of platform pricing

Will the FCA’s focus on platform value for money and new entrants to the market spur the more established players to rethink their costs?

Platforms are facing pressure to change their pricing models as new entrants to the market boost competition amid increasing regulatory focus on value for money.

Two entrants to the market this year – Embark and Hubwise – have revealed competitive pricing levels that position them at the cheaper end of the spectrum. But will this force the more established platforms to also lower their costs?

The FCA remains interested in the value for money that platforms offer customers and is examining this through a competition lens as part of its wide-ranging market study.

So, where next for platform pricing? Money Marketing looks back at some of the changes introduced over the past 12 months and talks to experts about what the future might hold for the market.

Downward pressure

Pricing movements in the platform market so far this year have mostly come from established players confirming changes to their pricing models. But new entrants have also launched with competitive propositions.

From April, Transact lowered the threshold at which clients move to a lower pricing tier from £150,000 to £120,000 and reduced its annual commission charge from 0.31 per cent to 0.3 per cent for portfolios between £60,000 and £120,000. The commission charge reduction also applies to portfolios of between £120,000 and £600,000.

In May, Ascentric moved to a single account charge and got rid of trading fees and charges for Sipp and drawdown administration.

Earlier this month Parmenion announced it would remove initial fee and initial dealing charges for new business and top-ups across all wrappers and products. The Standard Life Aberdeen-owned platform previously charged a 0.25 per cent initial fee, as well as an initial 0.9 per cent dealing fee on active solutions.

Meanwhile, two market newcomers launched this year that are clearly focused on competing on price. Embark Group revealed its “disruptive” pricing model last week, offering an initial discounted flat 15 basis point fee, regardless of portfolio size, for people joining the platform before the end of 2018.

Third-party investment accounts will originally be offered at 10 basis points.

From January 2019, they will have a 15 basis points charge, which decreases to 10 basis points as more assets are placed on the platform.

The personal pension has a 27.5 basis points charge, decreasing to 20 basis points when more assets are placed on the platform. Isas and GIAs have a charge of 20 basis points that drops to 15 basis points as more assets are placed on the platform.

A further 10 basis points charge is added for assets held in the Sipp wrapper.

EMBARK: How we put a price on our brand new platform 

Let’s be straight, we are not trying to be the Amazon of the platform market, taking out slow-moving players not alert to the importance of using agile technology to deliver on service and price. We are building a sustainably profitable, consumer-centric business that attracts the right kind of advisers and clients. We don’t believe the only way to survive is through scale. Several platforms have been down this road (Cofunds) and it hasn’t worked. Thus, inspired by Sun Tzu, we have chosen a different battlefield to the majority. There are four drivers behind our approach:

  • We are able to challenge on price while retaining a very healthy return on our investments. We think consumer, not ‘super profit’. Our alliance with FNZ and scale in the pension market enables this
  • We don’t have a back-book of revenue to ‘cannibalise’. You only get that advantage once, so we plan to use it
  • The  advice gap needs bridging for the mass-affluent. We have targeted a price point where these consumers can afford to take advice, using our platform. For high-net-worths, platform pricing is largely irrelevant and bizarrely the market is already sharply priced here
  • Our forward competition is the robo-advice market, not the platform players. Pricing is much sharper here across the value chain, so we have halved the price of where the market average client sits.

The reality for consumers is that the platform market will remain relatively low in its sensitivity to price. We don’t see the established players dropping charges because of us. They will fear cannibalising their existing revenue lines and baffled as to how we can profitably compete at our pricing point.

Phil Smith is chief executive of Embark Group 

Hubwise, which fully launched to market as a regulated platform in May, charges a 20 basis points platform fee capped at £480. According to recent Platforum data looking at the cheapest platforms for a model portfolio investor with either a £100,000 or £500,000 portfolio, Hubwise was one of the cheapest for both groups.

Platforum research associate Andrew Ashwood says while Embark and Hubwise have launched with competitive pricing structures, it remains to be seen how quickly they will be able to accumulate assets from advisers and whether established platforms will be affected by cheaper competitors.

The Lang Cat research and insight specialist Steve Nelson urges caution when considering price as the only metric for deciding on a platform.

He says: “If you look at new business flows and market share there is almost no direct link between price and new business. So if you look at Standard Life, which is one of the top players in the marketplace, it is well above the market average in terms of costs and Transact for a long time was above the market rate as well.”

Future movements

One “new” platform that is yet to announce its pricing structure is the combined Aegon and Cofunds offering. The two platforms currently offer significantly different price points, with Aegon charging 0.6 per cent for its initial tier and Cofunds charging 0.29 per cent.

Aegon has promised it will not increase prices for existing Aegon Retirement Choices customers or Cofunds users.

Aegon has been emphatic that scale in the platform market will drive prices lower, and Nelson says to back up this rhetoric it must announce a pricing structure that is closer to Cofunds’ pricing than Aegon’s.

He says: “Aegon has gone on record to say only scale will drive prices down, which is academically a reasonable thing to say, but based on the platform market to date I’m not sure that is being borne out. Some of the smaller platforms are the most profitable. Novia has got a legacy of profit and so does Nucleus.”

Nelson adds: “That initial 0.6 tier is now looking so far out of step with the market that it has to be addressed.”

Alliance Trust Savings remains the sole adviser platform with a fixed fee model but commentators predict more platforms could move to offering flat rate fees or capped charges. Aegon, Hubwise and AJ Bell currently have a price cap.

Nelson is surprised more platforms have not decided to implement a charge cap, saying the market in aggregate is “completely hooked” on unlimited percentage fee charging.

He says: “If you fast-forward a number of years, that should be something that fundamentally changes. The market in aggregate is still immature, you have still got people spending tens of millions of pounds on technology upgrades so it is probably fiscally not at the point where the market can tolerate that because you have still got platforms struggling to break even let alone make a profit.”

Ashwood agrees adding: “With advisers and clients becoming increasingly cost-sensitive, we could see more platforms begin to experiment with flat-rate fees or capped charges. The cost disclosure provisions under Mifid II will draw charges across the value chain into the spotlight and platform charges will not escape this scrutiny.”

Asked for predictions on where platform pricing might head in the near future, Ashwood says making charges for larger portfolios more competitive could be the “go-to” strategy in 2018.

The largest platforms are in the strongest position to implement disruptive price changes 

He says: “The largest platforms are in the strongest position to implement disruptive price changes – we see increased scale acting as an enabler of bringing down charges for the end customer.

“However, many of the scale players will have to recoup the costs of expensive technology upgrades so may be limited in their ability to bring charges down in the next 18 months.”

Ascentric and James Hay may have recently repriced, but Nelson says it is hard to say which platform might be next in line to slash fees.

He says: “If you look at some of the main players in the market, for example, Aviva is already lower than the market rate and it is going through a replatforming exercise and has committed to adding functionality at the same rate, which is a good move. I would expect Transact to continue on its path of making marginal cuts to the business.”

Nelson adds: “It is difficult to see, if there are predictions of wholesale cuts everywhere, where that will come from.”

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Comments

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

  1. Price is only one parameter and not ‘the’ reason to use a specific platform as we all know. However what is a problem is the stupidity of some platform providers towards their existing customers.

    I have new clients that I have managed to obtain a discount on a large portfolio with a large provider. Similar clients on the same platform are to remain on a higher charge because they ‘are not adding new money’. Treating customers fairly? I dont think so.

    Hence we are now looking to move them. I dont want to but it is the right thing for the client to save them hundreds of pounds a year. Crazy situation.

  2. Making things too cheap…. what does that do to service? Look at internet companies. Every person on the planet who is experiencing poorer service due to costs being cut (call centres overseas, less investment in technology, ATS…etc). I haven’t had clients that have a major issue with costs. U pay for what you get. I think most people would rather pay a bit more to get good service. I don’t know what the service is like with these new ones as they haven’t been around that long and I haven’t used. But as they get bigger with more clients etc what will happen to the service then especially if margins are very tight. Not to say, some companies charge a fair whack and their service is poor. I think Transact have been great so far, and actually as they have fixed fees on some of their product wrappers might be cheaper than the ones mentioned above except on smaller clients. Perhaps Transact could get rid of their dealing charge however. And maybe lower the charge on their product wrappers?

  3. […] price sensitive. It’s a similar story in advised platforms. To quote @langcatsteve from a recent Money Marketing, “If you look at new business flows and market share there is almost no direct link between price […]

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