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Raise the red flag issues

In 1865, Britain introduced the Locomotives on Highways Act, better known as the Red Flag Act. Among other things, the act stipulated that all mechanically powered road vehicles must be preceded by a man on foot waving a red flag to warn the public.

The law was eventually removed from the statute in 1896, allowing the motor car to deliver on its huge potential to revolutionise private transport. The rest, as they say, is history.

It strikes me that, in the world of financial services, we are now going through a similar revolution. Platforms have the potential to play a key role in a hugely positive change in our industry – and I fully expect them to do so. But at the moment, it feels like we are all still being held back by our own version of the man with a red flag.

A quality platform should underpin a fundamental change in the relationship between providers and advisers, and also between advisers and their clients, delivering a step-change in the quality and scalability of financial advice.

The technology should also deliver huge efficiency savings, which can be shared with consumers, particularly if they are empowered through increased transparency of charges.

All of this will improve the reputation of our industry and increase consumer engagement, something we all desperately need, given that currently over half of the public think that financial services organisations would mislead customers to achieve greater profits and also believe they are normally sold the product that offers highest commission.

It is perhaps no surprise that we still have a huge savings gap in the UK and that many of us will end up working into our 70s because we cannot afford to retire.

Despite all this, for many IFAs I speak with, platforms certainly are not yet delivering the expected benefits that they can and should.

What are our red flag issues? What is stopping platforms from delivering on their potential to change financial services in the way that cars consigned the horse and carriage to open-air museums and posh weddings? Here are my three main issues.

Red Flag Issue No 1

The first reason why platforms are not delivering on their promises is that many are not yet a truly revolutionary technology.

We are all familiar with the shortcomings of traditional product provider mainframe administration systems and processes. We have become resigned to delays, returned forms, data entry errors miskeying of information by inexperienced staff and even important documentation getting mislaid or “lost in the post”.

Unfortunately, most platforms have not done much to change the status quo in this area. Many still require paper application forms or are still product-centric in their set-up – they still require a separate application form, with a client signature, for each new investment or product wrapper.

In contrast, a few more modern platforms are more client-centric and are utilising true straight-through processing (STP) technology.

This may all sound like technobabble and irrelevant to your business but consider this – once clients have signed the initial platform-level terms and conditions and provided a specimen wet signature, there is no subsequent requirement to provide a client-centric platform with any paper. Ever.

New investments, for example next year’s Isa subscription, fund switches or even different product wrappers can all be transacted online, payments on to or off the platform can be made electronically, even anti-money-laundering information and adviser payments can be entered online with no need for snail mail. STP really does put the adviser back in control. Once the client data is entered on to the system, it never needs to be rekeyed and the adviser knows that any client information held on the platform is accurate.

Automatic validation almost eliminates the possibility of basic errors or missing information, which is the plague of paper-based processing and near real-time transactions are now possible. One platform (no prizes for guessing which one) even enables pension benefits to be set up online by the adviser. That has to be better than waiting days for drawdown illustrations to be sent in the post.

Putting wide wheels and a spoiler on a Ford Escort does not make it a Ferrari. Rather than focusing purely on price or on the number of bells or whistles a platform can claim, perhaps it is time to revisit the most fundamental raison d’etre of platforms, namely, to improve processing efficiency and to understand the key differences between new and old technology platforms. What could adopting a new technology platform do for your business efficiency and the cost at which you are able to deliver your client proposition?

Red Flag Issue No 2

The second concern raised by many advisers is the current regulatory status of platforms. The real efficiency and service quality gains of a platform can only be fully realised when a single platform is used to support the core client proposition of an adviser.

There are some IFAs who have already moved to this model but for many others, the use of a single platform, particularly where the investment or product wrapper range is constrained, is considered incompatible with their independent status.

The FSA has also been wrestling with this issue for some time now, clarifying that there is no limit to how much business can be written with a single product provider and moving towards principle-based regulation which focuses on producing better consumer outcomes. Yet the packaged product regime remains more or less unchanged. This is a contradiction which needs to be resolved as platforms move into the mainstream.

Under the RDR proposals, it will be essential for IFAs to use a platform that offers whole of market access to investment vehicles and one which allows any adviser charges to be managed in a flexible, yet simple, structure.

But perhaps the key change will be that differences in product wrapper charges will be shown to be of marginal importance as a percentage of total client costs.

This is already the position today, of course. But more transparency will, in my view, seriously call into question the client benefit of having multiple product wrappers, sprinkled liberally across different providers in order to save perhaps 0.1 per cent a year.

The true cost of providing an ongoing review and rebalancing service is significantly higher when several product providers are involved than when using a platform, so logically there will need to be a strong customer benefit to justify not using a single platform.

There will be some client propositions which do not involve an ongoing service but the regulator has made it clear that ongoing commission or fees should not be charged in these circumstances and so I would be surprised if most advisers aspire to take their business in this direction. There will also be niche products or very unusual client requirements which are not easily managed via a platform but, in the main, these will be the exception rather than the rule.

Perhaps the concept of independent advice and its value to clients needs to be reconsidered.

It should be based on being answerable solely to the client, on being clear about the service being offered to the client and on the cost of that service.

The independent adviser must be free to select the most effective way to deliver that service from the various platforms and product providers across the whole of the market but must equally be free to move client assets to a new home in a simple and efficient way if the initial provider does not deliver as promised or, based on a regular review of the market, a better proposition becomes available.

This is, in essence, what the June RDR consultation paper has outlined.

Red Flag Issue No 3

The final barrier to platform adoption is the challenge of implementing a different advice process.

Most firms are, naturally, designed around a world of product-based advice and paper-based processes. Much of the discussion over transition to the promised land of the new professional adviser is focused on the shift from away from initial commission but there are many other issues to be faced beyond cashflow and adviser remuneration structures.

Client propositions where the added value may have focused on product or technical advice may need to be repositioned. In a world of vanilla product wrappers and transparent pricing, a client’s goals and the investment strategy to meet these will take centre stage.

We are already seeing a shift in the advice process from product selection being the primary focus towards ongoing portfolio management being the key consideration and wrapper selection a secondary decision, based purely on tax optimisation and the requirement for access to capital.

In support of this shift in emphasis, staff training and competence will need to be rethought and the production line in the back office will probably need a major overhaul. For example, many compliance processes will insist on a comparison of packaged product illustrations or the output from a product-based best advice system in order to provide the advice rationale.

As highlighted above, the best customer outcome will look at the bigger picture rather than focus too much on individual product features and charges at the point of sale but there will still need to be a checks in place to ensure that the client falls within the target audience for the advice proposition in question and a regular review of platform marketplace must be undertaken on behalf of new and existing clients.

All this is a tough ask for many IFAs and so, despite buy-in at the highest level of a business, platforms fail to deliver the promised benefits through poor implementation.

On a more positive note, however, there are now several independent firms and even platforms who are offering transition consultancy and implementation services.

Despite the success of platforms to date, there are still some sizable red flag issues which need to be overcome if they are to deliver on their full potential, for everyone’s ultimate benefit. We need to cut through some of the noise about new technology and focus on what really will improve the efficiency and quality of our industry.

We must get over our obsession with packaged products and start to view platforms as independent dealing and investment administration services, and not as product providers.

Finally, the widespread implementation of a platform-based business model will not be easy. It is a complex and time- consuming process where external support will be required.


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