When given a choice between a fixed-fee or a percentage-based charging model, investors prefer fixed fees.
Platforum’s consumer research reveals when presented with a scenario for a £20,000 lump sum with either a 35 basis points or a £70 fixed-fee platform charge, active private investors are more than twice as likely to say they prefer a fixed-fee model.
While there is investor appetite for a fixed-fee model, we have not seen assets flow en masse to these providers. Among adviser platforms, Alliance Trust Savings is the only one to offering fixed fees. It ranks fourteenth among adviser platforms based on assets under administration. (It would be remiss not to mention Aegon’s charge cap for larger accounts, which looks a lot like a fixed fee).
Among direct-to-consumer platforms, Interactive Investor, which operates on a fixed-fee model, acquired TD Direct Investing last year. The combined entity will be the second-largest D2C platform in the UK and means that, in 2017, we will see a scale player offering a fixed fee.
But platform shareholders may shy away from fixed-fee models. Many of the costs platforms incur are charged as a percentage of assets, including technology and administration, FCA levies, pre-funding and importantly the cost of putting things right when they go wrong. Some of these could no doubt be renegotiated but percentage fees protect shareholders against escalating costs.
Flat fees are most appealing on larger portfolios. Platforms tell us there is usually an expectation that clients with larger portfolios will get better service. Cheap and transparent flat fees may not be sustainable for platforms, and clients with larger portfolios will not get the level of service that ad valorem fees could buy.
A platform boss, paraphrasing George Orwell, put it this way: “For advisers, some animals are more equal than others.”
Heather Hopkins is head of Platforum.
She can be reached at firstname.lastname@example.org