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Platforum: The FCA’s mixed messages over platform price and transparency

hopkins
Platforum head Heather Hopkins

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.

Platform fees

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

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. So if I was a large house builder, I would use my scale to bulk buy materials at a discount and negotiate preferential contracts for the actual building because of volume. But do I a) sell my house cheaper than the competition (passing on all discounts to buyers), b) sell them at going rate (making more profit for my business) or c) bit of both, with maybe other value for money benefits e.g. Fees paid.

    Maybe a stupid analogy, but I think we all know the answer is b)! And why shouldn’t a business be able to be more profitable from deals it’s able to negotiate, whilst providing the client with what they want? Sometimes feels as ‘only in financial services’ yet buying a house is often a persons biggest ever financial commitment!!

    Interesting to see outcome next year!

    • Heather Feather 17th July 2017 at 3:03 pm

      Andy, it’s not a stupid analogy. It’s a very good one. It will be a messy one for the regulator to untangle. Definitely interesting to see the outcome next year.

      Heather

  2. “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.”

    Perhaps I’m missing something here but where does it say in the rules or law that cost savings must or should be passed on to investors?

    If you think that through then it’s a rather silly position to take. Firstly, where is the incentive on commercial firms to make savings if they don’t benefit? Secondly, unless the FCA sets prices (bearing in mind the maximum commissions agreement was deemed anti-competitive) then it’s the market that will do so. Thirdly, there are two distinct platform markets here which need to be treated differently – direct to client and adviser led. The cost and market dynamics of each are different. Lastly, the history of regulators trying to influence the market has always ended in prices rising.

    Is there really anything fundamentally wrong with the market as is? Are there any firms out there making excessive profits on their platform activities? Far from it from what I can see.

    When a regulator does one of these studies they are more or less honour-bound to find something they can fix. Let’s hope it’s relevant and worth it when they do this time…

    • Heather Feather 17th July 2017 at 5:25 pm

      Good comments and I can’t disagree. The issue I think is that investors don’t know how much they are paying. Investors show a frustrating degree of apathy on something that has a huge impact on the long-term value of their portfolios. I think the regulator will face a tough balancing act on this one.

      • “Investors show a frustrating degree of apathy on something that has a huge impact on the long-term value of their portfolios.”

        So true but a fact of life. In my experience of dealing with clients over 25 years I reckon only 10% of clients will ever engage in the cost issue and it hasn’t changed over this time. There are a variety of reasons but essentially it’s human nature and not surprisingly you see it across all consumer activity.

        Regulators are of the view that giving clients more information will fix this but history says otherwise. They think consumers are like them, i.e. interested, intelligent and plenty of time to engage – a sad fantasy. PRIIPs and MiFID II will make things worse not better not least because they are self-contradictory and too complex for many industry practitioners to understand let alone clients.

        Instead of fighting against human nature the FCA should accept reality and work from there.

  3. Could I get clarification on the Transact versus HL fee negotiation? How do Transact ‘not’ negotiate? I can see many examples of Transact rebates being greater than even HLs. Surely this means Transact DO negotiate and negotiate hard if a relatively small player can secure a greater rebate than the mighty HL. I can also see instances of Nucleus beating HL, Transact beating OMW etc etc. Surely these smaller platforms are negotiating discounts therefore?

    • John, so sorry for the delay. I missed your comment. My understanding is that Transact don’t see it as their role to negotiate. They aren’t the buyer and don’t influence flow. But a fund group could offer a preferential share class on the platform. Or a financial adviser can negotiate themselves. Equally, DFMs negotiate. Transact don’t ‘gate’ funds as far as I know so that if a financial adviser has secured a deal on a fund on Transact’s platform it would be available to others too.

      I do hope that helps. Heather

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