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Nucleus: Don’t overlook the bigger platform issues

Two days into the FSA’s latest consultation period around fund manager rebates and mass hysteria seems to be the order of the day. At one end of the debate, Skandia is telling everyone that it was right all along and at the other end, more modern, transparent wraps are bemoaning the proposal to ban cash rebates.

While I naturally sit firmly in the latter camp I think much of the discussion since Wednesday overlooks the deeper strategic issues, most of which we gained clarity on last year.

The biggest regulatory-driven change occurring in the platform sector today is that fund supermarkets are about to lose 75 per cent of their revenue line.

That’s a pretty big number and one which throws the future of that sector into question. It seems pretty clear that the response will be to seek to replace this cashflow with a direct customer charge but that may not be as straightforward as it first seems.

After all, some clients probably believe that these platforms are (close to) free and very few advisers will have a full appreciation of the fund manager distribution deals that at least partly these legacy models.

This is the crux of the matter and where attention should be focused. The Deloitte paper which accompanied the FSA’s document posed some pretty probing questions regarding fund supermarket business models and so it looks like some of these old platforms may be confronting a dramatic change to their operating model from a position of structural weakness. Good luck to them.

On the wrap side it is possible that the unit rebate issue will go away long before December 2013 if the trend towards clean share classes continues. Should some groups persist with ’loaded’ share classes the various wraps in the market will just need to find a way to deal with unit rebates or more accurately, cash rebates to be reinvested in units. This feels more complex than cash rebates and there will an increase in trading activity as clients on balance will have less liquidity in their accounts but it certainly isn’t rocket science. Nor is it as challenging as having to replace 75 per cent of a company’s revenue.

It also seems that the FSA has recognised at least some of the operational issues and has hinted that there may not be a requirement to reinvest into a fund which the client has sold out of.

There’s some detail behind that and they may want to go further, perhaps even to say there is no need to reinvest if the buy instruction is likely to result in a sell again a few days/weeks later to meet portfolio liquidity requirements. Failing that it seems obvious that clients sitting on platforms with trading charges are going to get hammered, which seems unlikely to have been the regulator’s intention.

All in all it seems entirely obvious that the more open and transparent wrap model shall prevail. From where I sit I see no wraps working on plans to launch a fund supermarket. All good then and aside from cash rebates the only thing we’d really have liked to have seen would have been an extension of these rules across to packaged life and pensions products. Maybe the FSA has simply concluded that this sector is in terminal decline and therefore just not worth the effort?

David Ferguson is chief executive of Nucleus

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Wow, so many blogs by platforms today! David I’m replying only to yours as it’s more insightful, and no more self-serving, than the others. I agree with most of your comments, including on the anomaly of insurance bonds being excluded from the proposals. In their case though, I’d be amazed if advisers recommenced insurance bonds on the basis the products are retaining their opacity. It may happen in pockets, but hopefully the FSA would stamp on it.

    But there are things in the CP and supporting documents that should move you to be not complacent.

    First, I feel sure (the docs weren’t explict) that the “75% revenues” figure applied to fund supermarkets includes the trail commission they currently pay away to advisers. If so, it’s not really 75% since a large portion of the revenue hardly touches their bank account as they are effectively acting as a trail commision collection agent between adviser and provider. Say the average bps revenue from providers is 65bp (allowing for bond funds) and the average trail paid is 43bp, then net of the trail payaway you’re really looking at about 25% revenues rather than 75%.

    Secondly, when the supermarkets go unbundled let’s imagine they charge the clients the(approximately) 25bp post-trail they currently retain. Won’t they be undercutting the Wraps? In fact they could probably increase their post-trail revenue slightly and still undercut.

    Thirdly, do not underestimate these guys. On page 94 of the Deloitte report it quotes Nucleus’ fixed costs at >80% of its revenues. That’s a big number, requiring serious incremental assets and/or charges to progress long term. once everybody is unbundled and transparent, will Nucleus appear competitive?

    Finally, the wrap v supermarket thing is just industry navel-gazing. Both types of platform will meet in the middle but from different starting points, and will at some point compete head-on.

    I wish Nucleus well, as platform competition should be good for advisers and clients. Also David you’ve always argued for transparency and against hidden conflicts of interest. Watch out though, as once everyone is unbundled and transparent the big have every opportunity and motivation to get even bigger.

  2. I could have written that article – nicely put.

  3. I am seriously puzzled by the comments from Peter Hicks suggesting that fund supermarkets will seek to preserve current suicidal pricing (from their point of view) and not seek to use this opportunity to try and reach a scale of revenue stream which actually makes a reasonable profit. If not, why else are they in business?

  4. David Ferguson 2nd July 2012 at 10:41 am

    Thanks for taking the time to comment Peter. You make some very interesting observations most of which I would agree with.

    Your point about Nucleus fixed costs is of course accurate but due to the historic nature of the analysis now considerably out of date – today’s number is under 50% I think which feels rather more healthy and has arisen really due to the successful emergence of greater scale

  5. David Ferguson 2nd July 2012 at 10:44 am

    Re point (1) I fear the problem is that no-one really knows – looking at recent analyst reports on Old Mutual (for example) the historic revenue line is rather richer than widely recognised and may also challenge your assertion under (2).

    That said until we are able to fairly appraise pricing and proposition across all platforms we will all be (to some extent) in the dark!

    Cheers

  6. Hi Stanley, I’m not suggesting that supermarkets will necessarily refrain from seeking to increase their current pricing. Just pointing out that if they do they will undercut the wraps, or alternatively might give them scope to increase charges and still price competitively.

    As David says though, until we can all compare apples with apples we are guessing somewhat.

  7. Peter Burrows 3rd July 2012 at 4:17 pm

    I think the Nucleus wrap looks a good idea but where will this fit with RDR? From what I understand the IFA’s who use Nucleus are shareholders of Nucleus. Isn’t this a conflict?

  8. testing display name 4th July 2012 at 2:00 pm

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  9. Peter, don’t expect an answer it seems to me that is the Elephant in the room, one can moralise about Southampton day in day out but how are the user/shareholders to maintain their Independence?

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