While last year’s withering interim asset management market study report focused on the value of fund management, it did not escape the FCA’s attention that a host of ancillary services had grown to intermediate the delivery of opportunities to retail investors.
The regulator now wants to know if the lengthening chain has improved client outcomes or simply added costs. Does the provision of ancillary investment management services, platforms and sub-advised model portfolios serve the purposes of the investor or the service providers themselves?
A number of advisers have presented this as yet another example of a “defenceless” sector being dragged by regulatory buffoons into asset management’s problem. However, the FCA has a core purpose: protecting and enhancing the confidence of all consumers in financial services. Since advisers are at the heart of financial services intermediation by definition, they are never far from scrutiny.
Platforms put under pressure
Along with advice, ancillary investment services are dominated by platforms. Those with an adviser focus care rather less about market share and more about volume and margin. Despite their service being provided for advisers to administer investment decisions made on behalf of clients, platforms feed off the captive client.
Furthermore, they recognise that few advisers are willing – or indeed easily able – to migrate client banks, meaning they have the comfort of more predictable and growing revenues. This allows platforms to extend their influence. Since their primary goal is to gather assets, most are integrating asset management and distribution with the more utilitarian platform functions.
Open architecture is no longer a badge of investment altruism; multi-asset ranges and own-branded single-strategy funds using external managers feature strongly. There is weakening inclination to add new managers and funds to open-architecture ranges.
Retail investment sales are relatively price-inelastic. Platforms have little economic motivation to force existing funds to cut prices by the odd basis point, since this would lower the bar relative to their discounted in-house offerings unavailable elsewhere. This is another barrier to the free movement of investors’ funds.
Influence over advisers
The rising influence of platforms has deeper significance. The advice community has been encouraged to conflate the essentially separate activities of financial planning and investment management. This is lazily reasoned as a reflection of advisers seeking to offer a “holistic service”. But while my GP may have aspirations to offer holistic advice and activity, she recognises qualified surgeons are better equipped to perform operations.
It can be argued that fees for investment management are easier to apply than for financial planning, because the former are transparently based on performance. Value is easy to detect but the value of financial planning may be less easy to calculate. Fees measured in the thousands of pounds for financial planning are more easily extracted from a significant capital sum under the adviser’s control than by asking for them directly from the client’s chequebook.
Having control of the cash is, therefore, a commercial convenience where the fees charged are ad valorem; fees are linked to the performance of a portfolio, not to the efficacy of the advice.
Out of sight, out of mind, the activity of portfolio management cross-subsidises financial planning
Pre-RDR, naive clients thought they were getting advice for free, since the provider apparently paid their adviser. The cost was disclosed but the client often did not put two and two together. Nothing much has changed. Advice fees are agreed and disclosed but the platform provider facilitates payment by deduction from the capital. Out of sight, out of mind, the activity of portfolio management cross-subsidises financial planning.
Some clients may very well interpret the fee arrangement as being in respect of portfolio management, with financial planning as a free value-add. Meanwhile, the cost of advice has clearly risen, and in some cases doubled, since trail commission was eradicated. Trail payments of 50 basis points were introduced in the late 1980s as an inducement to sell fund groups’ regular savings Peps.
They were never a payment for ongoing service. Today, that annual fee is more typically 75bps and often 1 per cent. But in most cases it is being charged for financial planning, derived from investment management.
Making a mess of models
Justification has been sought through the semblance of portfolio management via the provision of “model portfolios”. These third-hand investments typically borrow asset allocation from providers (it is not a coincidence that platforms offer asset allocation tools) and populate the portfolios with funds cut and pasted from external short lists. Rebalancing is automated.
The FCA might ask what leads so many advisers to believe a prefabricated, platform-bound in-house bag of funds offers more value for money than one of over 1,000 tax-sheltered multi-asset Oeics run by professional, CFA-qualified fund managers, where the use of a platform is unnecessary from the client’s viewpoint?
How do they perform and how might a customer make comparisons? Does the use of passives reflect a rising rejection of active management or, more prosaically, the need to create headroom for adviser and platform fees? More fundamentally, does the value chain require stronger oversight to ensure its links are not mere conduits through which incidental capital performance funds grow revenue, with little commercial benefit for the customer? The FCA clearly believes so.
Graham Bentley is managing director of gbi2