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Alistair Wilson: Making advisers pay for platforms would prove costly for clients

Some argue the platform exists for the principal benefit of advisers, so why should clients pay? 

Who should pay for platforms: advisers or clients? The FCA did not quite arrive at this topic in its recent platform market review but it may not be long before it does. Why should clients foot the cost of platforms when, as the argument goes, they get no benefits from them?

Of course, this ignores the benefits platforms have in fact delivered to clients. Platforms have supported advisers in delivering new client services, such as adviser-led model portfolios. They have simplified pricing structures, making it easy for consumers to understand the true cost of investing. And they have swept away the old slow-moving paper-based world.

Paying for platforms: Who picks up the tab?

So what would happen if the FCA made advisers pay? For a start, it would hit clients in the pocket. There would be an increase in the cost of advice as advisers, acting like any other business, would add the platform cost onto their own charge. At a time when some investors already baulk at advice fees, this could turn more people away from seeking advice, resulting in more facing poorer financial outcomes.

Operating costs for advisers would also be likely to rise. There is currently no VAT charge on platforms as they are an intermediated service. But if advisers were required to pay for platforms, they may lose this special status, adding 20 per cent to costs overnight.

In a world where the adviser pays, there could be less incentive for them to switch platforms. It is conceivable providers would shift their focus away from what clients need from a platform, and more towards what advisers require. The platform would simply become an extension of the adviser’s administration service.

Furthermore, clients themselves would be less likely to switch platforms, given the apparent cost difference between an advised and a direct-to-consumer service.

Graham Bentley: Why advisers should worry about the FCA’s platform market study

There are a host of other barriers that would make an adviser-pays model impractical. Advised platforms would need a mechanism to handle orphaned clients. This could lead to a situation where those orphaned are asked to remove their assets from the platform, as there is no way to extract a fee from them. It is also unlikely advised platforms would want to operate dual functionality to cope with realigning the charge back to the client.

Before there are more calls to change who pays for what, there needs to be a proper discussion to fully understand the potential impact on consumers. Let’s not blindly lead ourselves into poorer outcomes for them.

Alistair Wilson is head of retail platform strategy at Zurich UK

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Advisers don’t mind either way.

    WRAP providers may have a bias and the writer of this article is the CEO of a WRAP provider I believe(and one that has just sold 2/3rd of their AUM)

    I’ve been thinking about this a bit recently and playing devil’s advocate with my own pre-conceptions and that includes what may be a flawed view of VAT as stated by Alistair.

    Playing the Devil

    1. Ignoring advisers new to the industry or those who have changed firms recently with no client bank. Let’s assume we look at the average one adviser firm and assume they use a back office system such as IRESS or Prestwood and an element of cashflow forecasting built in to it. How much does that cost each adviser and how much are they willing to pay?

    2. My back office system costs about £6k per annum and I am happy to pay that (wer’e a one RI firm with the equivalent of 2 full time admin/trainees. Our system wouldn’t go up much more if we had two more RIs which we will have soon(still under £10k cost though)

    3. Let’s assume the average RI has between £10 and £20 million of AUM (I don’t know what the average is, perhaps MM have figures?)

    4. The mean platform charge works out at about 0.3% of FUM I think, so that’s between £30,000 and £60,000 per annum clients are paying to platform/wraps for a combination of custody/acting as nominee and buying and selling etc on the WRAPs afvisers reccomend to them.

    5. Do advisers;

    a) value their back office systems more than the WRAP provider or
    b)vice versa at nearly 10 x their back office system cost???? or
    c) do they view it of broadly similar value to an adviser (and in turn therefore their client) and were we writing the cheque, would we pay 5 let alone 10 x?

    Conclusion – I have a sneaky feeling that if advisers were paying the platform/wrap fee directly that the say £60k going to a platform based on a £20 mill AUM would be negotiated down significantly to the benefit of consumers.

    It would then be for the adviser firm to decide whether to charge a flat fee a minimum or whatever to their clients and justify that TO their clients while explaining their logic to the FCA.

    Discuss xxxxxx

    • I’m not sure this represents a clear comparison on a like for like basis in terms of what a back office system does against what a platform does.

      I think you would need to examine the whole value chain to get a semblance of anything approaching a valid cost comparison.

      Based on 200 clients with an average of £100K and your raw figures (which I suspect does not account for other costs in the value chain), you would be looking at an extra cost £250 per annum per client – which is what you would actually be justifying to an individual client.

      I have commented before on the various layers of cost between the client’s money in the bank and the raw investment they actually get at the other end that actually grows. It raises lots of questions about where value is actually added and always worth exploring.

      • I agree there is a massive difference between a back office system and a platform/wrap and they are not a fair comparison with regard cost, henc ewhy I was focusing on the massive differnce in the cost, i.e. my back office system (which incorporates cashflow modelling) I cannot do with out and what I pay is good value.
        The WRAP I use most, I could do without if I used by back office systems full functionality, but that woudln’t save my client any real money.
        Therr is a loty of overlap between back office system and WRAP, and it is the fact that the latter costs my clients 10 x what my back office system costs.
        As Nicholas Pleasure says, there are seriosu problems with many WRAP in that a lot of them as he says don’t make money, the irony is that as WRAps like Transact have gradually reduced their cost to the consumer, those that cross subsidised from other parts of their back book are only just abotu breaking even now and many as we are seeing ar getting sold or consolidated.
        Consumers like consisitency and if we were paying for the WRAP as a tool w use for the benefit of clients as opposed to hwo many providers look for it to be a way to controlling FUM, they ability to distrort and influence would reduce perhaps.
        As I say, just palying devil’s advocate here in public BEFORE the FCA try and impose something on us again as was doen with RDR (I was very vocal on potential RDR outcomes from about 2007, am still here and advising, but most of the problems in FS pre RDR still remain.

  2. Some great points Phil.

    Also, let’s remember what happened when the maximum commission agreement went out the window.

    LAUTRO commission rates saw huge enhancements for large distributors such as networks and we all know how that ended up.

    This idea would see the same thing happen. Big volumes would attract lower costs that may or may not get passed back to the consumer and would just create another layer of fog over what at the moment is clarity.

    And another layer of unfairness for the smallerIFA firms.

  3. Nicholas Pleasure 13th October 2017 at 10:01 am

    I despair…

    Who pays for platforms should be up to the advisory practices and the FCA should not be attempting to micro-manage everything that we do.

    There are serious issues in financial services where clients are losing all of their money and honest advisory practices are putting their hands in their pockets for thousands of pounds a year to fund compensation that often only covers a fraction of the clients loss, let alone their distress.

    In answer to Philip Castle’s interesting points above, my recollection is that platforms are not exactly raking it in. Many of them fail to make a profit so, regardless of who pays, I cannot see the price reducing significantly without a massive reduction in choice.

  4. Assumiong this stupid idea emanated from Cuckoo House, it demonstrates yet again how far from reality the FCA is.
    They keep coming up with harebrained ideas presumably just to try and justify their miserable existence.
    Who would benefit from this change? Certainly not the client!

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