The Retail Distribution Review’s wrap paper, along with a new FSA fact sheet for advisers about using Fund Supermarkets and Wraps, have given the clearest guidance to date on how the regulator currently views the platform market. One of the main things that has become clear is that the regulator wants advisers to consider carefully how they use wraps and how this benefits their clients.
Demonstrating client suitability and in particular the suitability of the platform service itself is crucial. To satisfy the conditions outlined by the FSA, important ingredients of an appropriate platform will be:
• Extensive range of funds and tax wrappers
• A full range of customer agreed remuneration options
• Extensive range of management information tools and client valuation capability
• Independent risk and asset allocation tools integrated within the platform
• Comprehensive on line switching capability including bulk switching
• Straight through new business processing
• A sound reputation and financial standing
• A range of training and support services including face to face local support
Some of these requirements are relatively easy to judge. We recently carried out extensive research looking at the demand for funds; after contacting over 600 advisers, 78 per cent responded to show that they wanted a platform provider with access to 1,000 funds. So that becomes an easy figure to benchmark platforms against.
However, areas such as the reputation and financial standing of the platform provider may be harder to judge but this does not mean advisers can ignore it. A number of leading platforms in the UK have such short track records that they are yet to prove the sustainability of their business model, continue to make a loss and rely on additional funding from their shareholders.
Advisers must look for a platform that is built around a robust and sustainable business model. This will enable them to develop the platform to ensure it meets the demands of advisers and clients into the future. Basic laws of business prove that initiatives that do not make a profit rarely, if ever, stand the test of time.
The charges levied by platforms is another key area where direct comparisons between platforms can become complex and advisers need to ensure they look at the whole picture rather than just the headline figures. Our fund group colleagues often remind me that of the top 50 performing funds five years ago, only two funds are still in the top 50 performing funds today. Switching is therefore vitally important to both advisers and clients. Some platforms offer this service free of charge therefore encouraging the use of a well structured investment strategy that can be reviewed and adapted when needed.
On other platforms a switching charge of around 0.25 per cent is common. On the face of it this is an incidental charge and, in the absence of any attempt to reflect the likely impact of the charge in literature and quotations, this is exactly how the charge is perceived. This lack of transparency is something advisers need to see through as active switch activity can result in substantial costs.
For example, if a third of a £50,000 portfolio is switched every year the total cost of a 0.25 per cent charge on all switches occurring over a 20 year term would be £1,810.
It is clear that the FSA wants to see changes that will help the market evolve, generate a positive consumer outcome and raise standards across the industry. Skandia fully supports this initiative and believes a key starting point is for advisers to make sure they are associated with a market leading and sustainable platform.
In some ways sustainability is a further aspect of the FSA’s Treating Customers Fairly principle because if there are any questions about the long term future of a platform or of the likely availability of resources to fund its continued development then is it fair to customers to use such platforms?
Any adviser who remembers stakeholder pensions will no doubt view loss leading, “low cost”, platforms with the suspicion they deserve.