Financial regulators want to boost competition for market players and lower fees for investors. But occasionally these values are in conflict. An example is the FCA’s terms of reference for its platform market study today. It points to a world in which scale matters more than ever.
While the name of the report suggests it is about platforms, the scope is defined up front as covering the wider distribution landscape, including financial advisers, wealth managers, product and wrapper providers, technology providers and fund ratings and data providers.
The final report will be out next year, yet the FCA should be cheered already for expanding the optic. At Platforum, we believe the wider focus is correct. In considering value for money, it is important to look at the broadest possible picture. This means that financial advisers are in scope for this review, as users of platforms and in some cases as platform providers themselves.
One of the areas the regulator has signalled for review is whether cost savings are passed to the investor. This applies to the deals that advisers negotiate with platforms and the deals that advisers and platforms negotiate with asset managers.
At the same time, the regulator repeatedly raises the issue of transparency and the ability to compare costs to assess value.
We think that deals reduce transparency and make it harder to compare costs. It also makes it harder to transfer accounts from one platform to another through in-specie transfers, potentially reducing competition.
Platforum regularly publishes heat maps comparing the rate card prices charged by platforms. The charging structures are complex – some more so than others. But heat maps offer a limited picture. Most advisers negotiate deals with platforms, typically in return for securing a spot on the adviser firm’s panel.
These cost savings are directly passed to the investor as the investor pays the platform fee. But these deals are confidential making it harder for advisers to know whether they are paying a fair price, relative to peers
Access to cheaper share classes
Some platforms negotiate hard with asset managers and as such secure access to lower cost share classes.
We view platforms on a spectrum from the agnostic order takers (i.e. Transact) to those guiding investors toward particular investments (i.e. Hargreaves Lansdown).
Transact doesn’t see itself as a buyer, so it doesn’t negotiate with asset managers. Hargreaves Lansdown is in a different boat, using its dominant position to negotiate preferential charges. Hargreaves Lansdown brags that it has negotiated an average 23 per cent saving on the on-going charges on the funds on its Wealth 150 select list. We estimate that 38 per cent of direct platform gross sales go to funds on the platforms’ own select lists (although not all funds on select lists are discounted).
While negotiating lower fees may seem laudable, it makes it harder to compare costs across platform. Platform fees are one thing but if you then need to take into account the cost of the underlying funds that is much more complex.
The other challenge posed by differential share classes is that it makes transferring accounts in-specie more difficult. This potentially reduces competition as it limits the ability to switch platforms.
Scale bring leverage
Larger platforms and larger advisory firms are better able to negotiate prices. This gives an advantage to scale players. Large advisory firms can get better deals with platforms and asset managers. DFMs with more assets can get access to better share classes and platforms that do negotiate with asset managers can use their scale as leverage.
This certainly creates barriers to entry – a concern raised by the regulator. And we doubt whether many of the cost savings are being passed to the investor. Advisory firms that have negotiated deals take notice. The regulator will be looking at whether those savings were passed to investors.
I don’t doubt there are some nervous executives at large advisory firms. Firms that have negotiated hard for preferred rates with platforms and asset managers but continue to charge 2 bps overall may find themselves in hot water.
All this deal-making, which the FCA’s platform market study condones, makes it harder to advisers and investors to compare cost. It also may reduce the competitiveness of the sector by making it tougher to transfer money across platforms. And it gives an advantage to the scale players by introducing barriers to entry.
The FCAs position looks somewhat contradictory. On the one hand they seem to be suggesting that platforms should use their buying power to negotiate discounts on fund charges. On the other, they appear to be concerned over commercial arrangements between platforms and intermediaries.
What action can the regulator take? Banning deals would be deemed anti-competitive. Encouraging them doesn’t seem much better.
Heather Hopkins is head of Platforum