Where was the big bang on orphan clients?


Platforms have downplayed the impact of the sunset clause on the scale of orphan client numbers on their books but experts warn reported figures may not tell the whole story.

The sunset clause came into effect in April resulting in trail commission for advised platform business being switched off. The change followed the FCA’s ban on cash rebates and payments between fund managers and platforms in 2013.

Stopping trail commission led to fears that long-standing clients could become “orphans” as advisers were forced to consider if it was worth servicing clients who previously attracted trail commission but who may not justify an adviser fee.

Older platforms were expected to be hit the hardest because of the scale of legacy business.

With trail being cut, it was predicted advisers would look to disengage with those clients, leading to platforms that have a large amount of advised business having an increasing number of orphans on their books.

Six months on from the rollout of the sunset clause, Money Marketing examines the extent of the orphan client issue for platforms and whether platforms have the functionality to cope with a challenge that is only set to grow.

What the platforms say

Platforms have typically been part of an advised process, but following the sunset clause questions are starting to be asked about how clients who find themselves without an adviser are being serviced.

Nucleus business development director Barry Neilson says: “Increasingly, advisers are looking to be more specific in the types of clients they offer their services to. They provide a deeper service and they may be less willing to deal with clients that may not be financially viable.

Most platforms’ features and processes will have been designed to deal with the presence of an adviser. If a platform ends up with a significant part of its client bank not having an adviser relationship but it has got a regulatory responsibility to deal with those clients then that issue might have increased significantly for some platforms as a result of the sunset clause.”

Money Marketing approached Cofunds, FundsNetwork and Old Mutual Wealth to find out the percentage of orphan clients they had before and after the sunset clause.

Cofunds, the only business to disclose their figures, says less than 0.3 per cent of its end investors are currently without an adviser.

Proposition and marketing head Sam Christopher says the company has not seen a sudden increase in orphaned clients since the sunset clause. But reported figures from November show less than 0.1 per cent of Cofunds’ 800,000 end investors were orphans, signalling a tripling since then.

Christopher says: “Contrary to market predictions, we’ve seen a high number of advisers retain their customers as they develop their own service, offering simplified advice at an economical cost.

“For the small proportion of investors who choose not to receive ongoing advice, we also support many advisers who offer non-advised services, such as our execution-only brokers.”

In 2014, Cofunds said if it converted all its clients to clean share classes in bulk, it would have 600,000 clients where trail had been turned off.

Fidelity Funds Network also claims it has not seen a “material increase” in orphan clients.

Old Mutual Wealth declined to comment.

The Lang Cat principal Mark Polson says he was expecting a “bigger bang” after the sunset clause but expects the number of orphan clients to steadily rise as advisers get to grips with business that is non-critical.

Polson says: “For a lot of advisers trail was a small but steady stream of income and they won’t have felt the impact of that stopping yet. Even though it has stopped, it is not necessarily the case that causes them any pain because many firms have lots of clients from the past that are effectively self-serve anyway.

“Over time you will see those numbers creep up more. But what will happen is there will be a niggling but increasing volume of stuff in the background of ‘what do we do about these clients?’”

Investment consultancy Gbi2 managing director Graham Bentley agrees there are likely to be more orphans in the market than what is being reported. He says this is made more problematic because the definition of orphan clients is unclear.

Bentley says there have been historic issues with platforms trying to establish if a client was “orphaned” on the basis that some investors were paying out trail for services that were not being delivered.

He says: “Once the platform decided it was going to switch off trail they got protests from advisers who assured the platforms they were servicing those clients. I suspect a lot of those clients may be orphaned without realising it.

“Now that trail is not being paid there is little to go on to establish if somebody is orphaned. An IFA could say to a client they will have customer-agreed remuneration where the client will pay 75 basis points a year and, as a consequence, as long as that agreement stays in force the platforms will continue to pay it.”

He adds: “Having a set of statistics that says we have ‘x’ amount of orphan clients is saying this is the small number of clients we have on our books for whom there is no customer-agreed remuneration. That can define them as being orphans but what it does not tell you is how big that potential orphan bank would be were people put in a position where they might pay a fee for no service.”

The FCA does not have a definition for orphan clients. In its March thematic review on legacy books it classed orphans as clients that had no professional contact with their adviser in the past three years.

Polson understands orphan clients are treated as direct clients for regulatory purposes. But he points out advisers would still be on the hook for potential issues with advice suitability even if they no longer service a client.

Bentley highlights potential regulatory issues with the customer notifying the platform they have disengaged with their adviser, given the platform will consider its primary relationship is with the adviser.

He says: “It is highly likely the platform’s standard practice would be to say the client has to get in touch with their adviser.”

Expert view


Through changes such as the sunset clause, if clients are woken up to the fact they are paying through the fund then they might have thought advice was free. Clients may decide to move away from that arrangement because they cannot see where they are getting value from their adviser, which could then put strain on the platforms. However, advisers and  platforms have got to be careful because unless the platform is officially disengaged then the adviser is still responsible for that customer. The platforms will not be keen on having thousands and thousands of these kinds of customers because they will still be obliged to service them in the interim.

Advice firms could offer the client a move to its direct business – if it has one – a switch to another platform, or the client could move to a different adviser that uses the platform. Facilitating a shift to a direct offering would benefit the platform because, although orphan clients might be a lower value customer than a typical retail customer, they still add to the company’s client numbers and funds under management figures. Keeping those customers on board is therefore good for the platform as well as maintaining good customer service.

If the customer chooses to go direct, it then depends if the platform is in that market and if it wants to keep those customers. FundsNetwork has a big direct offering and Old Mutual Wealth is heading in that direction. While Cofunds would have to service those clients in the short term, I am not sure it has gone down that route with as much vigour as some of the others. However, its new owner Aegon has a big direct piece so that could be an option for Cofunds’ clients.

The platforms will treat direct-to-consumer and advised offerings as two separate propositions. While everything in the background will be the same, if they are going to do it properly and provide the right tools and services to the customer – and the regulator will be keen to make sure it is done properly and the customer is not left out of pocket – then they will need to split those two offerings.

Ben Hammond is senior consultant at Altus Consulting

Adviser view

Page-Tim-Page Russell-2014-500x320.jpg

Tim Page
Page Russell

The advisers this will have been an issue for will have sold up and the indirect evidence will be firms that are signing up with the likes of St James’s Place. The sunset clause was deemed to be an almost doomsday scenario for some people but those it has affected will have sold their firm, moved the assets onto a more modern adviser charging arrangement, or exited the business.