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Platform price pressure: will advisers start to absorb the costs?

The issue of who should pay for platforms is a red-hot topic again – so what is the answer and what are the consequences for advisers and clients?

The long-running debate about who should pay for platforms – advisers or clients – has reared its head again after consolidator AFH announced it will no longer charge clients for using a platform.

AFH, currently one of the most prolific acquirers in the market, says no other charges will increase as a result.

The move came ahead of the FCA releasing its platform market study interim report on Monday.

With the regulator’s laser focus on value for money and competition evident again, will more advice firms follow AFH’s lead?

Paying the price

AFH claims it is the first advice firm in the UK to decide to absorb platform fees. The change will start by the end of the year.

The national firm, which acquired six IFA businesses in the first half of 2018, says it had already used its “growing purchasing power” to negotiate lower platform fees.

The firm did not want to name the platforms it has longstanding relationships with, but says firms it buys can continue to use whichever platform they were using before the acquisition. AFH, unlike fellow consolidator Succession, does not run a white-label platform of its own.

A spokesman says the established low rates it has negotiated are what has led it to be able to stop charging platform fees to clients. The firm is clear no other costs will increase because of the move.

AFH did not want to comment as to what its current platform costs are. However, chief executive Alan Hudson believes more advisers will follow AFH’s lead.

He says: “Platforms are too expensive anyway and as it’s mainly advisers who benefit from using them, we don’t think it’s right that our clients pay for them.”

Research found 87 per cent of advisers said clients should pay for the platform as the client is the main beneficiary

Data from a Platforum survey last October hints AFH’s move will not open the floodgates for more advice firms to take on the cost of using a platform. That research, in which 285 advisers were polled, found 87 per cent of advisers said clients should pay for the platform. Nearly three-quarters (73 per cent) said the client is the main beneficiary of the platform’s service.

National IFA Ascot Lloyd, which merged with consolidator Bellpenny a year ago, questions if following AFH’s lead makes commercial sense for advice firms.

Investment director Steven Lloyd says: “It’s an interesting decision as historically wealth management firms have offered their own platforms as an additional way to increase their income.”

Lloyd adds: “There are a lot of regulatory demands when you are a platform operator and, as we have seen with the Old Mutual Wealth platform, there are heavy costs involved in ensuring clients have the latest functionality and issues with re-platforming. That has to be taken into account as a risk with this approach.”

Ascot Lloyd has a panel of five platforms – Aegon, AJ Bell, FundsNetwork, Parmenion and Zurich – and says it has used its scale to negotiate discounts, which can be up to 50 per cent off standard charges.

Lloyd says: “At the outset of the business we had neither scale in terms of assets under management nor large numbers of advisers. However, we completed our due diligence and identified the platforms we wanted to work with, and we then talked them through the business plan and our vision for the company, and they were all comfortable to give us preferential terms. We continue that process and the custody charges have been reduced further since then as the company has grown.”

Adviser view: Jeannie Boyle, director, EQ investors

From my experience pretty much anyone can negotiate, but it varies between platform about how open they are to amending the published rates. Its very difficult to get a sense of who is paying what for various platforms, but in some cases even for a firm our size it does make a difference. I don’t think there’s any published list showing how they go about it, not one they are willing to share with advisers at least. It depends not just on the size of the assets, but also maybe on promises to use as a primary platform, the promise of business and the faith on what you are going to put on there.

Network Tenet says deciding whether to absorb platform fees would be down to each individual advice business in its group and would not be something imposed by Tenet.

Business development director Ben Wright says: “Tenet has always enabled its appointed representatives to run their own businesses as they choose within our regulatory framework.” He adds: “All of our firms are continually considering ways to ensure that they remain competitive on cost and offer great value for money to their clients, which may involve periodic reviews of their charging structure or the decision to discount their fees in certain circumstances.”

Tenet launched its own platform through Hubwise last year and tells Money Marketing it also “supports all of the major platforms”.

Wright says: “We have negotiated some great platform charge deals for our members with a number of market-leading platforms, and we continue to keep close contact with providers, to ensure that our members have access to the best possible deals in the market.”

Exactly what the threshold is – in terms of assets firms hold on a platform – for advisers being able to start negotiating deals on platform fees remains unclear.

Some discretionary fund managers will discount charges, charging around 10 basis points less

Last month Money Marketing reported discretionary fund managers will discount charges for portfolios run through platforms, with some believed to charge around 10 basis points less.

Investment Quorum chief executive Lee Robertson says advice businesses with more than £100m on a platform can start to negotiate discounts. But he acknowledges there is an amount of “secrecy” around discounts, and platforms prefer to negotiate individually with each firm.

Investment Quorum negotiates “hard” on clients’ behalf for lower fees, Robertson says.

He adds: “We pass our platform fees on to clients but totally explicitly. We are totally transparent and explain the benefit of the platform and what it can do for the client and that it is part of the charging structure that we pass on to clients.”

Robertson says AFH is to be commended for absorbing the platform fee and pledging not to increase its adviser fees as a result.

He says: “Good, thoughtful firms are always looking at ways to deliver more value to clients so I suspect this will be part of a trend during a period of low returns to try and reduce the impact of charges on clients. It will come down to the individual firm, its profitability and its business model.”

Pilot Financial Planning director Ian Thomas is more sceptical, questioning if the move is a “self-interested PR exercise”. He says it is hard to know if this will create pricing pressure in the market, without having a clear idea of what AFH’s charges are.

However, he adds: “If [the overall cost to clients] can be kept at a level that is reasonable then that is the most important thing. From the client’s perspective it doesn’t matter if it is because the fund managers are being squashed down in price or if the platform fee has been removed or if advisers have reduced their fees.”

Expert view: Graham Bentley, managing director, Gbi2

AFH saw the writing on the wall

In 2017, the average all-in advice, portfolio management and platform cost for a retail investor was around 200 basis points. By 2022, in an expected low-return environment that will need to shrink to 80bps if the proportion of portfolio returns lost to fees, which is currently around 24 per cent, stays the same.

In the US, robo-adviser Wealthfront already charges an all-in 25bps.

In the UK, B2B platforms provide services for advisers. By following the trade press or studying platforms’ sales and marketing strategies one recognises those platforms’ customers are the advisers.

Platforms perform web maintenance, migrations and system testing at weekends, because that’s when advisers are off duty, despite that being when customers are most likely to want access. Clients aren’t completely free to do what they want, because that is deemed to interfere with the adviser/client relationship.

Representing thousands of clients, firms negotiate on price; individual clients can’t do that

Over a client’s investment life, the negative impact of ad valorem platform fees on returns is astonishing. For example, on a £1m portfolio growing at 5 per cent a year on one of the leading platforms with zero advice cost, the fees reduce the return by more than £187,000. Given lower expected returns, something has to give.

While advisers are unlikely to take one for their clients by aggressively cutting their own fees, which have almost doubled since RDR, larger advice brands like AFH clearly see the writing on the wall, electing to absorb platform costs themselves. Representing thousands of clients, this allows those businesses to aggressively negotiate on price, which individual clients are unable to do.

The FCA has identified that the clients of some larger advice businesses with significant assets under management are already benefiting from preferential prices negotiated with both platforms and fund groups.

While advice remains a cottage industry, negotiating power is negligible. National businesses with scale and strong management have the opportunity to create new financial services brands that resonate with investors, delivering quality financial advice at a reasonable price.

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Nicholas Pleasure 20th July 2018 at 10:23 am

    I’d be interested to know what AFH’s ongoing advice fee is, to include platform costs? As ‘one of the most prolific acquirers in the country’ I’m interested to know what happens to clients who may be paying 0.5%. Will they be told that, maybe AFH charge 1% but you get the platform for free?. I don’t know, but it would be good to get some clarification.

    There are huge savings to be made by IFA firms in paying for the platform. You do one set of due diligence and then you can put every platform client in the same place. It’s free, so nothing else can touch it. That saves research, suitability, the whole lot.

    It may not always be best for the client, it ties the client to your firm and, fascinatingly, it reverses unbundling of charges (which was never something that clients wanted anyway).

    I see huge advantages to IFA firms in doing this. It may not always be in the clients best interest. This quote “He says: “Platforms are too expensive anyway and as it’s mainly advisers who benefit from using them, we don’t think it’s right that our clients pay for them.”” shows a total misunderstanding of the value of platforms to clients. How many of your clients want to go back to the old system?

  2. Some thoughts:

    1. ‘The long running debate’…. it feels like a recent debate from where I’m sitting?

    Is there an attempt to bring a relatively new and arguably niche viewpoint and try make it ‘common ground’.

    2. On what grounds do platforms generate economies of scale to discount their fees by 50% to large advice firms? Is this an inducement / a cross subsidy at the expense of smaller advisers?

    3. Why is the tide turning back to bundling costs? Haven’t we spent the last 6 years doing the opposite.

    4. The total cost to invest is the key thing.

    Many people discuss their portfolio cost (but not their fees), their fees (but not their platform and portfolio cost) or the platform costs (i.e. here).

    How it breaks down is broadly irrelevant (i.e. one can hike advice fees and reduce fund costs and vice versa but the client still pays the same!).

    Anecdotally, I feel there is positive correlation between passive portfolio use and higher advice costs however there shouldn’t be given that they are each ‘independent of each other’ decisions.

    5. If our firm is expected to pay for a platform, we’d likely either increase our fees accordingly (as we don’t have the margin to meet that cost) or we’d stop using platforms given that we certainly do not gain a benefit in line with the costs associated – specifically, we don’t use a number of the ‘add ons’ platforms seem to spend client fees in developing.

    The benefits are broadly the clients (in theory faster transaction times, we control admin, pre-funding, easy tax wrapper management) etc etc.

    Platforms have, in many cases, increased the workload on our firm – why would we pay for that whilst making things less transparent for the client?

  3. I want to understand the mechanics of what AFH are proposing to do. For example, does the platform charge AFH a flat fee irrespective of the number of clients on the platform or the AUM? Or bps on the client AUM.

    Incidentally, either way, the client still pays, its just a case of who they are paying.

    • Neil Liversidge 20th July 2018 at 4:28 pm

      Completely right. This is a non-debate. All that matters is how much the client pays in total, not what the split is. We have rock-bottom pricing and shall certainly not be absorbing any platform costs. We don’t need to because we still beat AFH, SJP et al by a mile.

  4. Taking an example of a small firm with say £40m on a platform, making £100k net profit for arguments sake, 25BPS equates to the entire profits of the business, so the client fees would have to go up.

    All in all a zero sum game unless you have a large number of HNW clients on a percentage basis, in which case profitability is very high and there is fat to be trimmed.

  5. Er….advice firms derive 100% of their revenues from client fees. So, ultimately it’s the clients who’ll pay for the platform anyway. For the firm to “absorb” the platform costs they’ll have to either: (a) increase client advice fees by a like amount, or (b) become a not-for-profit organisation.

  6. The B2B model (advisers paying platforms) is a backward step in my opinion, as clients pay anyway so it just removes the transperancy of what the platform costs the client.

    If large firms negotiate discounts, than why can’t these discounts simply be charged on client accounts, instead of just making it more opaque.

    And a warning for platforms facilitating this, why do business which is unprofitable simply so you can say our FUM is bigger as a result.

    If these consolidators keep buying up advice firms, all they are doing is buying up distribution control and once at a sufficient scale will simply think that they can do it better themselves, buy an off the shelf platform from FNZ or Bravura and then move everything on mass anyway, change their models from growth through acquisition to growth through vertical integration, restricted advice, and opaque charging…aka the SJP model.

    Their strategy is just so obvious and the regulator should open their eyes and look very closely at whose best interests are these companies serving.

  7. @ Nicholas Pleasure
    Out of interest I did a google search on AFH fees. There are a lot of results about the platform news. Their own site only states they offer advisory or discretionary, not how much they cost.

    A different forum on pistonheads shows a query from a member who’s IFA moved to AFH. He was offered the AFH discretionary service with a 4% initial cost to move, 1% discretionary fee plus any fund costs. There were no details on the size of the pension fund to be moved.

    https://www.pistonheads.com/gassing/topic.asp?h=0&f=206&t=1623805

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