Just how long should we assume that a client will stay with the same platform? This is not some arcane theoretical question; it is an important issue when trying to judge the true costs and benefits of choosing a platform, especially when it comes to switching.
When we conducted platform pricing analysis back in pre-RDR times, we typically used reduction in yield calculations over a timespan of a decade or more. We had to make assumptions about which funds would be used, because different platforms offered different rebates and used different share classes.
Just consider how times have changed since then. How many of the funds in those scenarios are still on advisers’ panels? The RDR, new platform rules and Mifid II have all come to pass since those comparisons were run. Model portfolios were not so prevalent and pension freedoms had not appeared on the radar.
The adviser platform market is less than 20 years old today. The age of many platforms is less than the timeframes of scenarios that were used to assess them. However, assumptions remain crucial.
The FCA’s platform market study identified switching as an area of focus in its interim report. Any cost benefit analysis on switching a client (or clients) from one platform to another needs to include an assumption of how long the client will remain on the destination platform.
Switching platforms involves much more work than switching investments. So, if an adviser charges £700 to switch platforms (that is the median figure given in the FCA’s interim report) that is an adviser charge of 0.7 per cent on a £100,000 portfolio. Over how many years should that cost be amortised when justifying the switch?
Technology improvements might make switching easier and cheaper, which would probably lower the barrier, but it will not eliminate the costs altogether.
This conundrum is borne out in our research, where platform pricing occupies a lopsided position on platform selection. Advisers consider cost to be one of the most important factors in their initial selection of a platform for a client but, when it comes to switching, it is far less likely to be a crucial determinant.
A drop in service, usability or functionality are more likely to prompt advisers to consider moving a client from one platform to another. It is hard to justify moving to a lower cost platform when the cost of switching exceeds any immediate cost savings.
Major changes in client circumstances, or new entrants into the platform market, may prompt advisers to revisit existing platform relationships. But there is a relatively high barrier for switching an existing client between platforms. This all naturally leads to status quo bias and brings to mind the cliché of the frog being boiled alive – turn up the temperature gradually and the frog doesn’t notice until it’s too late.
Individual platforms’ pricing levels have gradually declined since the RDR but their pricing structures have remained relatively static. Platforms generally target the same types of clients they did back then, and so tend to have broadly similar pricing models. However, advisers should be mindful of gradual changes across the market that make a client’s current platform comparatively more expensive than the competition.
Finally, clients almost certainly value continuity of relationships. Investment is confusing enough without having to deal with a different set of paperwork, terminology, customer service and possibly client logins every few years.
Consider an executor attempting to deal with poorly-filed paperwork from a multitude of platform providers over the years, or an adviser trying to calculate capital gains tax liabilities from investments purchased two or three platforms ago. It is not just pricing that inhibits switching.
Richard Bradley is associate research director at Platforum