Platform gurus have recently been opining on the FCA’s deluge of market studies; in particular questioning the point of the Investment Platforms Market Study.
As Lang Cat consulting director Mike Barrett saw it: “You can’t help wondering whether the more detailed areas of focus are structured to prove (or disprove) a problem the FCA is not entirely sure exists.” Perhaps. But there does not have to be an obvious problem for the FCA to conduct a study. Study is not a pejorative term. As I have said before, the regulator is not an investment or distribution expert. If the industry pleads “no problem here, nothing to see, move along”, the FCA would be failing in its duty to customers and the wider industry good if it took that at face value.
Being “non-expert” allows it to ask questions industry-biased specialists might regard as naïve, yet a customer would ask if he or she was informed, motivated and better resourced to do so.
The Asset Management Market Study was seen as entirely warranted by those rather less-than-partisan in their support for the fund management industry. It seemed obvious something must be done, and the report finally paves the way for a healthier fund management industry with better outcomes for customers. That said, the asset management landscape has a wider vista than fund management per se.
During the initial study consultation process, the FCA came to recognise that, despite its habit and history of conflating financial planning and investment advice, the two were distinct disciplines. Furthermore, financial planning could operate completely separately from the investment value chain.
Indeed, that chain might be better designated as a pipe, with an investor at one end and an investment opportunity at the other. The regulator knows that investment pipe has a variety of outlets in between. Their naive question is whether these irrigate the client’s portfolio or are simply drainage into the plumber’s garden.
The study is about the entire pipe – platforms, certainly, but also the related impacts of investment advice, research and other ancillary services that purport to add value.
Opportunities to access the provision of a retail investment portfolio are almost exclusively via a platform. Those opportunities are significantly constrained in many (but not all) cases; for example, where Sicavs, investment trusts, ETFs, structured products and direct shareholdings might be suitable.
Adviser-focused (B2B) platforms are particularly uncompetitive in this area, the excuse often being there is no demand from their adviser base. Direct-to-consumer platforms, on the other hand, have more to lose by constraining opportunity, as there is no intermediary acting as filter. This mismatch is worthy of investigation.
Investment advice depends on B2B platforms. Not only is investment vehicle availability constrained accordingly but the proliferation of model portfolios can be directly attributed to platforms’ hosting capabilities. The regulator may question to what degree these models act as channels to cross-subsidise advisers’ fees rather than adding investment value, but whether they actually constitute any value to investors.
As an adviser service, the B2B platform will probably offer a risk profiler, a risk-focused asset allocation model, free qualitative fund research data from an indep-endent researcher and a fund filtering tool, portfolio X-ray, reporting and monitoring. Mifid II requirements on reporting will almost certainly be handled by the platform from January. Very handy for the adviser but only indirectly for the investor.
Advisers, who may have limited investment knowledge but are utilising all these support tools, charge their customer on average 70 basis points per annum, plus the platform fee. To all intents and purposes, they are replicating the activity of the underlying fund managers’ multi-asset offerings. The only valid explanation for doing this via a non-bespoke model portfolio is if the adviser believes they offer better value than the thousands of managers and products from which they select portfolio constituents.
That is difficult to ascertain. While a unitised fund is easily compared with another, and tools to do this are freely available to investors online, this is not the case with model portfolios. Clients would find it difficult to compare model portfolios with funds, let alone compare various advisers’ portfolios with one another. As a competition and transparency issue, this may feature significantly in the report.
In the final analysis, those purporting to offer investment advice and managing portfolios may find themselves subject to the same regulatory oversight any other asset manager has to operate under and hold the same level of technical qualifications. Indeed, under the FCA’s gold-plating of Mifid II, all portfolio managers will bear the same responsibilities as recognised fund managers, including those relating to research payments (research will have a cost attached, otherwise it is deemed an inducement). This may have a significant impact on those research business models that charge for licences while distributing the underlying research for free – and on those advisers using it.
Most crucially for advisers, I expect the study to demonstrate that the value in financial advice is in financial planning rather more than investment portfolio management. The criticisms aimed at fund managers are likely to be similarly aimed at portfolio managers, both discretionary and advisory.
I would argue these model portfolios are easily built using platforms’ tools and are likely to proliferate via (cheaper) guidance models than advisory. In turn, that will present significant opportunities for anyone willing to develop guidance solutions – particularly fund managers looking to obviate investors’ reliance on intermediated investment advice.
Graham Bentley is managing director of gbi2