Revealed: The ‘anti-RDR’ payment deals between advisers and platforms

Advisers and platforms are agreeing deals which are said to be going against the spirit of the RDR and have been likened to the “pay to play” models of the past.

Platform charging models have emerged which blur the supposedly clear lines set out by the RDR of distinct charges for advice, platforms and investment management.

While cash rebates and payments between providers and platforms have been banned, fee structures still muddy the waters for clients. What is more, in the drive to win business platforms are operating volume discounts which as well as being opaque to clients may also be influencing advisers’ platform selection.

Following on from our cover story last week on the merits and challenges of different platform charging models, we take a deeper dive into the more unusual arrangements between advisers and platforms as concerns are raised about whether these deals are consistent with what the RDR was trying to achieve.

‘Service’ charges

Money Marketing has seen details of a “service charge” levied by Chase de Vere and paid through the Cofunds platform. The service charge is paid separately from the advice charge and platform charge, and Chase de Vere says this is to cover “ongoing investment and development to enhance the quality of service to clients through an integrated service proposition” (see box for Chase de Vere’s full statement).

The service charge starts at 0.08 per cent for investments up to £100,000, and tiers down to 0.02 per cent for investments between £250,000 and £500,000.

Chase de Vere is carrying out a review of its preferred platform partners. Money Marketing has also seen a separate email sent out by the advice firm to one platform as part of the tender process which talks about the ability to facilitate the service charge as being a “key requirement for us”. The email goes on to explain the service charge is “not an advice charge but is disclosed as such” and that the charge should not increase costs beyond the standard terms available to the rest of the market.

One source familiar with the deal says: “Instead of what it should be doing, which is negotiating a discounted deal with Cofunds as a platform, Chase de Vere has negotiated that reduced cost and added extra basis points to bring it back up to the level it would be otherwise.

“An independent firm has narrowed the market as to which platform it will use based on who will disclose charges in that way. There’s not many firms that would be prepared to that, nor that would have the mechanics to do this because it’s a very unusual thing to do.”

Cofunds says the service charge functionality is open to all advisers who use the platform.

Head of marketing and proposition Sam Christopher says: “As part of our proposition, Cofunds’ service charge allows all advisory firms to apply a monthly ongoing fee relating to the services provided. Cofunds does not comment on any contractual agreements.”

‘New generation’ of payment deals

The Lang Cat principal Mark Polson says firms that are agreeing these kinds of deals will have had regulatory experts review the structure of these arrangements. He says the FCA should be aware these deals are in place, and whatever the regulator thinks, it has not taken steps to explicitly ban additional charges.

But he says: “It is certainly against the spirit of the rules which state the advice firm is remunerated based on advice charges and nothing else. Advice is a service, so having an advice charge and a service charge and treating them as two different things feels really weird to me. If you’re a small firm or a regular sized firm, this sort of stuff just isn’t part of your world. It is unusual that we would have one rule for one and one rule for another. The question is not so much whether this is legal, but does it fly in the face of the spirit of the RDR.”

Polson says while distribution deals between providers and big advice firms have been banned under the RDR, payments facilitated through platforms to advisers amount to something similar.

He says: “If I were to be cynical, I would say this is the new generation of marketing packages and joint initiatives, which existed until they got outlawed. In these kind of models, it is just a game of hide and seek. It reminds me of those aggressive tax schemes we hear about, where a firm sets up a scheme and the Revenue shuts it down, and then you find another way of doing the same thing.

“There’s plenty of options if you want to derive margin from offering platform services. Those are completely above board, because firms are getting their hands dirty in the provision of a platform, and they should be able to make a profit from that.

“These arrangements are more like getting the platform to sacrifice some margin, but instead of passing it back to the client it goes into the advice business.”

Altus Consulting head of innovation Adam Jones says at one level there is a basic requirement for platforms to be able to facilitate an adviser’s chosen charging structure.

Over time networks and national firms may have agreed non-standard ways of charging, and so their platform and their technology will need to reflect that.

But he says: “The other side of the equation is should this fee be charged at all? With pretty much every retail distribution mechanism post-RDR, we have a very clear way of charging customers. We have a distinct and disclosed fee for advice. We have a platform fee which covers the administration of assets and any requirements around client money and trading.

“We have asset fees, and then sometimes on top of that discretionary management. It’s hard to see what the service charge is for.”

Jones says while the service charge may be used to build client interfaces with the platform, he argues it would be more appropriate for the advice fee to cover those costs as it is a cost associated with running an advice firm.

He adds: “It should be quite easy to justify all fees, as that’s what the RDR was for, to make everything transparent. The FCA hates stealth charging, and rightly so. The principle should be that every fee can be explained, and it clearly relates to a service delivered.”

Elsewhere in the market…

It is not just the service charge model that has been challenged. Nucleus charges 35 basis points for its platform, but under a white-labelled offering with Paradigm clients are charged an additional 15bps paid back to Paradigm through Nucleus.

Paradigm says this covers the cost of its discretionary fund management service, Tatton Investment Management.

Paradigm senior partner Paul Hogarth says: “It’s a distinct charge, including VAT.

“There’s no question of it being some kind of fudge – there’s 20 full-time employees running the discretionary management service. I can understand why some might challenge this, but our service is a comprehensive and professional one, with massive overheads. Tatton is a major business managing over £4bn-worth of assets.”

Nucleus chief executive David Ferguson says: “We are happy with the arrangement with Paradigm, and have never experienced any issues with it.”

Volume discounts

Platforms typically agree bespoke charging deals with advice firms, and one trend is to offer discounts to advisers to incentivise business volumes. Money Marketing has seen one example from Aegon which cites a 25 per cent discount on standard charges based on an expectation of £3m assets a year. Aegon was unavailable for comment.

Standard Life also offers discoun-ted pricing based on volume. A Standard Life spokeswoman says: “Such discounts pass clients the economic benefits inherent in dealing with firms operating at a larger scale with a platform. Client discounts are not reduced if a firm reduces its holdings with us, so there is no disincentive to moving assets elsewhere if it is in a client’s best interests.”

Polson says: “I’ve always felt uncomfortable about this. There is no suggestion that anything untoward is being done, but I just don’t like it. For businesses that are saying they put the customer at the heart, it seems incredible to me that an adviser in one shop has a better price than the adviser in the next shop just because they favour that platform with more of their business.

“In these models, the saving grace is the benefit goes to the client rather than the adviser or provider. The argument goes that if I’m buying a million tins of beans, then I want a better price than the cost of a single can, but we’re not buying tins of beans. We are dealing with people’s savings.”

He argues there is a wider issue with these so-called “trigger points” or “hurdles” to secure discounts. He says: “The big problem with hurdle rates and expectations of assets from advisers is it suggests there’s a bargain between firms, and there shouldn’t be. Clients don’t come in ‘books’, they come as individuals.”

Jones says there will be big advice firms looking for the best deal for their legacy clients, and then there will be the question of which platform is right for new business.

He says: “Say, for example, clients have been segmented into two groups: the wealthy and the mass market clients, with wealthier clients going on one platform and lower value ones going on another. If one of those is giving me a discount based on volume and there’s steps I have to ratchet through, how can I be confident that there’s no bias in my business as a whole to drive me through those boundaries?”

Jones adds advice firms set their own charges framework, but they may be cracked down on retrospectively. He says: “Firms can essentially do what they like, but the regulators can pick you apart on it afterwards. No one signs off a charging structure before it goes live.

With things like adviser charging, it is less for the FCA and tends to be
the FOS enforcing it on a case-by-case basis.”

How Chase de Vere explains it service charge

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Money Marketing asked Chase de Vere to set out how its service charge works, why it is separate from the advice charge, and whether it is a requirement for preferred platforms to be able to offer the service. This is Chase de Vere’s statement in response:

The platform service charge is levied separately to our advice and service charges.

This is a charge facilitated and collected by the platform provider on behalf of Chase de Vere to support ongoing investment and development to enhance the quality of service to clients through an integrated service proposition.

The charge is fully disclosed to clients in all relevant documentation provided by both Chase de Vere and by the platform provider and also by our advisers in one-to-one client meetings. It is important to note this is not an additional charge on top of the standard platform charges.

So for example, with Cofunds a client who pays the platform service charge through Chase de Vere will not have higher overall charges than a Cofunds client with a different adviser who does not pay a platform service charge. Our clients will never pay more than the standard platform charge.

It is separate from the Chase de Vere advice and service charges because it has a separate purpose.

We are currently undertaking a platform review. This has not yet been completed. As you would expect from an IFA firm, we do this on a regular basis to ensure products and platforms are the most appropriate for our clients.

The two main platforms we currently recommend are Cofunds and Standard Life, although we have many clients on other platforms. Equally, our advisers are not restricted to using these platforms.

When conducting platform reviews our number one priority is the best interests of our clients.

There are a number of platforms that are able to facilitate a platform service charge. It is not a requirement that our preferred platforms are able to offer this but it is requirement they are able to offer very competitive terms for our clients with regard to service, functionality, product/fund accessibility and charges.