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Richard Leeson: Should platforms charge advisers rather than clients?

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When the fund supermarkets and wraps came to market I wondered who their real customer was supposed to be. Two years on from the implementation of RDR I find myself no further forward in answering that question. And that has me worried. The RDR was intended to raise professional standards and with regards to platforms the FCA has this to say:

“Using a platform can improve your business’ administration. However, there are cost implications to adopting this technology and you need to ensure that adopting a wrap does not increase the complexity and costs to your clients without giving them valuable services in return.”

I am worried because, as a consumer with experience of five different platforms, I am struggling to identify what those “valuable services” might be. The only difference between myself and the typical platform investor is that I have more inside knowledge, so I consider myself a reasonable proxy for a consumer view.

One of the platforms kindly agreed to meet with me recently, as a consumer, to hear my concerns. During the meeting the following customer services from the platform were mentioned:

  • Online valuations
  • Custodianship of assets
  • Ease of trading
  • Fund discounts

While not an exhaustive list, it captures the main benefits that platforms advertise to retail investors. Clearly advisers should be careful in selecting platforms for their clients to ensure these benefits not only fit the needs of their client but also represent good value for money. The due diligence process for platform selection should include an analysis of the client facing benefits to ensure they are fit for purpose. This behoves the adviser to ensure that the benefits are as advertised.

Offering online valuations might tick a box for some clients but how up to date are they? Many platforms update their valuations the day after trading; some take even longer. Is this valuation clear, fair and not misleading, then? Custodianship of assets might be more cheaply achieved using a nominee account or open architecture product.

Ease of trading will be a benefit to many clients but is it at a price commensurate with the value? Several thousand pounds a year is not an uncommon fee level for high net worth investors on a platform. Fund discounts are valuable; the client could pay far more going directly to the underlying fund managers. Of course, the client could go to a non-advised platform and obtain the same levels of discounts.

There are also adviser benefits. Online dealing, automatic reconciliations, adviser charge collection and so on, all offer tangible cost and time savings to the business. The growth of platforms certainly has more to do with adviser demand than client demand. My worry about platforms is who benefits most: the client or the adviser?

My platform providers, with one notable exception, have shown no interest in talking with me or indeed even communicating to me as a consumer. Despite the fact I am the paying customer in the relationship, my views have not been sought at all. They all, however, have regular contact with their financial advisers, who dictate the development agenda for the platform.

Future improvements to functionality, therefore, suffer from a conflict of interest: does the adviser push for client-facing improvements or adviser-facing improvements? The platform consumer may be paying the provider to improve the profit margin for the adviser. If this fed in to lower costs of advice then there would no issue but, as we know, the costs of advice have been rising since platforms appeared.

Platforms and advisers might want to give thought to a change in business model. Charge the adviser firm and not the client. It would require higher advice charges to include the platform costs but there is no reason why overall costs for the investor should change. Adviser minds would become more focused on the total cost of delivery of advice, product and platform to the client, since it could be expressed as single unitary amount.

These are not just issues faced by me and the platforms I have dealt with. Those platforms that charge retail investors need to be very clear about who the customer is: asking the investing public to fund adviser profit improvements is not what RDR intended.

Richard Leeson is chief executive officer of Adviser Advocate

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Great article (sic), Why don’t I just pay the clients to advise them, sounds great!!

  2. Ha! I can see why you’re saying that Cyril. But to be fair to Richard, he’s proposing client still ultimately covers this cost in what they pay you, but with the difference that advisor and end-user interests become more closely aligned (in theory).
    Admittedly, tricky to make work in practice though, especially if advisers tried to move unilaterally in that direction.

  3. It’s all to do with the total cost of ownership. This is made up of 3 parts. Adviser charge, platform charge and fund manager charge. If you are doing the job properly your clients know this. What irritated me about platform valuations was that it was easy for them to add a figure at the bottom showing overall cost of fund management charges and platform charges as per the valuation based on an annual figure. But they couldn’t be bothered. I used to invoice for my fee, so in that case they would have known exactly what the annual charges worked out at. For the year end tax report the platform could have entered a definitive figure for the charges as at 5 April.

    I have to admit that what Mr Leeson proposes is logical. But it needs a culture change not only for advisers, but at the platform. If you consider that a platform is nothing other than a utility mainly for the benefit of the adviser it rather brings to light the suggestion. But platforms will have to buck up and treat advisers as valued customers. They must not therefore offer direct to consumer facilities. Then one can ruminate further. Will advisers have different charge scales depending on how much they have with a particular platform? Will that fall foul of inducement rules? Will it disadvantage the smaller firms? Will the dreaded VAT be charged?

    As with so many logical propositions, the practicalities are far from straightforward.

  4. Richard, I am not sure what you have said is in reality true, but can only talk about myself as an advisor. I frequently review the service of platforms and dependent upon the extent of what they can offer to both me as and advisor and my clients I will choose, but will also look to negotiate on their charges and some platforms might even cap their charge once a clients assets go above a certain value. There are many benefits of a platform if used correctly to diversify and move funds free of charge, something that can often not be done if buying direct.

    I suppose you might have a issue if your platform was recommended, but then not utilised to its full potential? (a bit like having a SSAS for pension investment but not making use of all the benefits).

    I would also disagree that costs have been rising since platforms appeared… there are a number of reasons why an advisers charging structure may have changed that might just coincide with the introduction of platforms. I think that if you ask many advisers their running costs have increased and their administration and recording requirements have also increased as a result of regulatory changes. That is not to say regulation isn’t necessary, but unfortunately it all adds extra time and administration to the client servicing proposition that needs to be paid for.

    Having said all that the use of good IT training and tech administrative support really helps to the extent that I have been able to at worst keep my costs the same, or at best lower the cost to my clients, (but I can only comment about me).

  5. Duncan Carter 26th May 2015 at 6:22 pm

    I think where the real benefit lies to the client is that issues can be dealt with more quickly and this is reflected in our fees. We’re not making a greater margin just because it’s easier for us rather the other way round.Go back 20 years and picture the costs to clients, paperwork and all round hassle of say a rebalancing or fund switch exercise especially post RDR

  6. Graham Bentley 26th May 2015 at 6:57 pm

    About time someone brought this up – well said Richard.

    I recall an adviser opining that the best Platforms were “…a means of delivering the adviser’s proposition”. The Platform proposition model was, (from the Platforms point of view) and still is, based on servicing the adviser’s business (unless you’re HL). Evidence the platform sales teams selling themselves as “Business Consultants” in the run-up to RDR.

    Pre RDR the fund supermarkets billed the fund group via rebate, and charged the client a relatively insignificant flat fee irrespective of assets under administration. I recall many advisers complaining that non-Wraps were in the thrall of fund managers, and not recognising the benefit to the customer. Under the now ubiquitous Wrap pricing system clients are worse off, and fund managers a little better off. A number of Platforms have offered their key advisers the option to pay a flat fee (ie using the platform as a back-office utility), with no charge to the client. Most have refused the offer. Some have accepted it, but on the condition that they can go back to the ad valorem position if they don’t achieve the business levels required. Some platforms are attempting to improve their engagement with the advised customers who pay them, but are afraid of the backlash form advisers if they are seen to be “getting too close”.

    Frankly, some advisers need to man up, recognise the platform as a clearer benefit to them than the customer (try running your business without the platform looking after your fund aggregation, portfolio management, research capability, asset allocation modelling, client reporting and fee facilitation), and build a business model that reflects that.

  7. Piers Clarkson 26th May 2015 at 9:06 pm

    Are we financial planners or administrators? Are we financial planners or fund managers?

    We use tools to deliver our service and a platform is one that we can put forward to a client, the client has a choice and they then pay an explicit charge for that.

    We then explain investment charges and they agree to those and pay for it.

    We then explain our charge and they pay for it.

    All along the way we tell a client what they get for the relevant charges, we manage expectations?
    We treat everyone fairly?

    How about I now change to a model where I tell the client I use a tool which is called a platform and it is included in my charges… I also will recommend funds… which are included in my charges…

    The overall charge is x is that ok?…. Am I now becoming a life company are things becoming opaque again?

    It is fun going around in circles:-)

  8. While Rome burns, people prefer to fiddle!!

  9. Anthony Peters 27th May 2015 at 7:49 am

    Whilst the article raises some interesting questions, my experience from the advisory firms I deal with is that the true value lies with the “advice” given and that clients are happy to pay the agreed fee. If a client is not happy then they have the freedom to change advisor or select a D2C platform. Finally, not many clients want to have input to platform development from what I hear?

  10. “There are also adviser benefits. Online dealing, automatic reconciliations, adviser charge collection and so on, all offer tangible cost and time savings to the business. The growth of platforms certainly has more to do with adviser demand than client demand. My worry about platforms is who benefits most: the client or the adviser?”

    This assumes that everything works as it should and manual checking isn’t required: I am sure many on here will testify that this isn’t the case!

  11. An interesting debate… it would ramp up the level of due diligence on platforms if nothing else…. and presumably, as mentioned previously, would we prefer to pay a fixed fee rather than an asset related one?… how many charging models would be exposed this way?.. would it see a generic shift to fixed fees rather than percentages? would it drive profitability up or down? would it actually deliver any real benefit to clients? all worth thinking about.

  12. I think if advisers concentrate on giving advice instead of trying their best to undermine everything we do we will be better for it. Platforms have their place as does investing with providers directly. Should be pay Aviva for being able to utilise their website for quotes etc?

  13. Bella Caridade-Ferreira 27th May 2015 at 10:40 am

    I’ve been saying this for years. The customer’s only real needs (custody /valuations etc) should be charged separately. The adviser should pay for the extra bells and whistles he needs as he would for any other piece of hardware and software he uses to run his business. I don’t see why the adviser cannot negotiate one fixed price with a platform to obtain those services. Adviser keeps his costs down through bulk buying, costs come down for client, so it’s a win-win for all.

    The FCA would probably object though. It would undoubtedly see this as a return to bundled pricing.

  14. Duncan Gafney 3rd July 2015 at 2:01 pm

    I think you might be missing the point Richard, you suggest that the Platforms add value to the adviser, but little to the client, but what you seem to fail to understand is that any value added to the adviser is also value added to the client through such things as lower fee’s etc.

    Were the adviser not to use a platform, the to make the same level of profit, they would have to charge you more, you would have to pay for such things as portfolio rebalancing, switching etc because they would be far more time intensive and therefore costly. The consumer ALWAYS pays in the end.

    Platforms, help to improve the “efficiency” of the overall advice proposition, which has generally resulted in the cost to clients for the product and funds reducing (even with the platform fee in the equation).

    One cost added into the equation recently (by RDR) that i’ve yet to see any article mention, is the anomaly of previously tax deductible expenses, such as commission are now non tax deductible. I believe that this is also the case for the platform charge.

    Previously commission and the platform charge was a normally “tax deductible” expense, as it was part of the fund management charge and therefore came out of the fund before tax was taken. However post RDR, both the platform and adviser charge is now applied post tax.

    If you assume that the platform charge is only 0.3%pa and the adviser charge is only 0.5%pa, they now have a reduction in yield effect (assuming say 20% tax) of (0.3 + 0.5)/80×100, so what was a 0.8%pa cost would now become a RIY of 1.0%. If the tax liability was say 35% overall, that RIY jumps to 1.23%.

    If the platform charge is 0.4% and the adviser charge is 1%, then using the same % tax rates as above the RIY becomes 1.75% and 2.15%.

    Comment?

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