The news Lighthouse is launching its own investment funds and a preferred platform arrangement with Zurich is further evidence of the evolution of both the asset management and platform markets.
I understand the decision was driven by the vagaries of how fund managers change the risk profiles of funds over time. The move demonstrates that the technology the firm put in place to help clients in this area is now more important than any asset manager. Fund managers need to recognise there are new rules of the game; they must learn how to earn shelf space. Those who do not adapt are now entirely disposable and can be replaced swiftly.
Fund managers who cannot work with risk profiling criteria create additional work for advisers, resulting in more costs for clients. But the need to monitor manager adherence to the tolerances of risk profiling tools is an avoidable expense, as is the frictional cost of the resulting fund switches necessary to stay in line with the agreed client objectives.
By establishing its own funds Lighthouse can clearly set the objectives for the managers to stay aligned with the risk profiles it has agreed with the client. The firm uses Distribution Technology’s risk profiling tools at the heart of its advice process. It has worked with Octopus Investments to build the Luceo funds with the objective of staying within Distribution Technology’s risk profiles four, five and six.
These are all actively managed multi-asset fund of funds. The process is managed by Octopus, which is accountable to Luceo’s investment committee. Lighthouse has the option to replace Octopus if performance or other objectives are not met.
Launching three funds initially, the intention is to widen the range both with actives and passives. Charges are currently described as “middle of road” for active managed funds, targeting 1.35 per cent including all costs.
Having put in place funds that can be kept closely aligned with the agreed client requirements, Lighthouse needed a platform to distribute them through. And while not looking to build its own from scratch again it wanted more control. As such, it has entered a preferred platform arrangement with Zurich. The initial deal is for five years, at the end of which Lighthouse could plug in an alternative platform or renew the arrangement.
Lighthouse customers receive a 6.5 basis points discount on the annual platform fee, as well as additional life cover in the first year. Zurich has also upgraded its integration with Intelliflo’s Wealthlink capability – Lighthouse’s chosen client management system supplier – to enhance the level of straight through processing that can be achieved, further reducing costs. Negotiations are ongoing to make the Luceo funds available via a small number of other platforms.
In creating these new options for its advisers Lighthouse has maintained the rigour of its existing research solution but provided more flexibility. Advisers can still opt for other solutions or indeed go outside their normal approved product list, but additional controls have to be addressed if they do.
Overall, this is a positive deal for Lighthouse and its clients, and both Octopus and Zurich have an opportunity to build the sort of next generation strategic relationship that will be valuable to their businesses long term.
Platforms or asset managers that think they can preserve historic margins are failing to understand the combined impact of RDR and technology on the advice market. In my experience, very few platforms and even fewer asset managers fully understand how to adapt their operations to reflect the impact of this combination.
Advice businesses have historically handed over far too much margin and embedded value to institutions. Post-RDR they are well placed to negotiate better pricing and services and more equitable distribution of the value chain. Any advice firm not looking to make such changes is missing significant opportunities.
Expect to see several more similar deals in the near future as adviser firms enhance their services to customers, grow their value propositions and reduce their regulatory risk.
Ian McKenna is director of the Finance & Technology Research Centre