“Aggressive pricing games” in the platform market could threaten the sustainability of smaller players as platform charging structures come under the spotlight.
Last week, Money Marketing kick-started the debate with Alliance Trust Savings and Nucleus arguing the merits of flat fees and percentage pricing.
As the only advised platform in the UK that uses flat-fee pricing, ATS branded ad valorem charges as a “tax on wealth”, while Nucleus said the “hidden fees” associated with a fixed-fee model were unclear. Both sides argued their favoured charging model was more transparent.
In light of the debate, Money Marketing has taken a closer look at how platforms charge, including recent changes in fee models and why it is difficult for customers to switch to a better price.
Charging models unpacked
There are four main platform pricing models offered in the UK: tiered percentages, fixed percentage fees, cliff-edge pricing (fees based on an administration charge that is a percentage of the whole value of the portfolio, with often sharp reductions in charges at the edge of each tier) and fixed fees.
Tiered percentage pricing is the most common model among UK platforms with 15 of them using this structure, according to Platforum.
Three platforms use fixed percentage charges: FundsNetwork, Praemium and Raymond James. The latter also uses tiered percentage pricing. Elevate and Parmenion use cliff-edge pricing.
Some platforms also levy additional charges, for example on set-up fees for flexi-access drawdown, tax wrappers and charges per trade.
Several platforms have tweaked their charges already this year. Royal London-owned Ascentric has made the biggest departure from its previous model; it will move to a single standard account charge and scrap trading fees and additional charges from May.
In March, James Hay announced plans to overhaul its charging structure in a move that will favour large investors. The business is increasing charges for the lowest investment tiers and reducing fees for the higher band by 0.04 percentage points. Changes to the James Hay IPS Managed Portfolio Service will come in from 28 April and to the Modular iPlan from 31 May.
Transact, one of the pioneers of the ad valorem model, has this month lowered the threshold at which clients move to a lower pricing tier, from £150,000 to £120,000.
Aegon has promised not to raise charges for clients currently on the Aegon and Cofunds platforms. Speaking to Money Marketing, Aegon chief distribution and marketing officer Mark Till does not rule out considering a flat-fee model for the new-look Aegon/Cofunds platform.
Till says: “Aegon would consider any structure that allows us to meet the needs of the advisers we work with.”
Meanwhile, Standard Life says it does not intend to tinker with the charging models of its Standard Life Wrap platform or Elevate, which it acquired from Axa last year. However, it did increase prices for new business on Elevate from March.
Standard Life adviser and wealth manager propositions head David Tiller says: “The pricing models are slightly different for the two platforms, reflecting the services they provide. We have no plans to change the pricing models of either.”
The Lang Cat principal Mark Polson says some of the price changes seen in recent months have been low-cost platforms coming into line with the rest of the market.
Polson says: “We see regression to the mean as probably the big theme.
“Even price cuts are mainly bringing things back into line. So it’s not a model thing as much as those who are outliers finding that they have the capacity to bring their charges up a little.”
Tiller has concerns about the sustainability of platforms whose charges remain at the bottom end of the market, as well as the impact of large-scale replatforming projects that are putting pressure on the levels of capital providers have to reserve.
He says: “We have some well-publicised replatforming projects that are coming at an enormous cost and companies are having to reserve extra capital. And then you have some players playing aggressive pricing games. They can’t both be right.
“There is a risk that aggressive pricing will push some small platforms into a very difficult space.”
Clear and transparent
Platform providers argue there is no right or wrong fee model as long as it is clear what is being charged.
Till says: “I don’t think transparency is about structure of pricing. It is about visibility, and does the customer understand the price so they can make a fair assessment of whether that is a good price for the service they get. That is totally separate from whether that price is a basis points charge, a flat fee or some combination. Does the client know what they are paying, is it clear, and do they think it is good value?
“That is my focus: to make sure whatever pricing structures we have are transparent so advisers on behalf of customers can make a clear assessment. Customers themselves also need to understand the price of our platform and the additional charges they pay to both the adviser and the investment manager.”
Whichever model is used, Gbi2 managing director Graham Bentley says the argument platform charges are easy for the adviser to understand is no defence if they do not offer the client value.
Bentley says: “It is not the adviser’s money that is on the platform. Most of these platforms are designed as a back-office system more than as an aggregation and valuation service for individuals. Whether you were charging a fixed fee or a percentage, it begs the question: why is the customer paying for it if it is a service for advisers?
“If advisers had to pay for it without physically passing it on, you can bet they would all want a fixed price.”
The different charging models have varying impacts on the platforms themselves, with percentage pricing highlighted as the preferred model to increase revenue.
Bentley says: “The more money you have on a platform at a fixed percentage, the more money you will make. The idea of having a fixed fee is not that appealing unless you can persuade people to give you increased volumes in exchange for the price. It doesn’t appear at the moment that platform business is price elastic.”
Tiller adds opting for a fixed fee brings increased risk around covering business costs.
He says: “If you go for a fixed fee, for your business to be equally successful it would have to be higher than if you charged it as a variable fee because you have variable costs that you will have to reserve capital to cover. If you don’t know whether your fixed fee will cover those, you have got to build in some insurance.
“The liabilities that exist for a platform are hugely different compared to the size of customers.
“The simplest way to think of it is a multimillion-pound customer compared to someone with an Isa on a platform. If something goes wrong and there is compensation, if you were to try and insure that compensation anywhere externally in the market, clearly the insurance from the multimillion-pound portfolio would be substantially higher.”
How major platforms charge
Percentage pricing: Aegon, AJ Bell Investcentre, Ascentric, Aviva, Cofunds, James Hay, Novia, Nucleus, Old Mutual Wealth, Raymond James (Model 1), Seven Investment Management, Standard Life, Transact, Wealthtime, Zurich
Flat-rate: Alliance Trust Savings
Fixed percentage: Fundsnetwork, Praemium, Raymond James (Models 2 and 3)
Cliff-edge: Elevate and Parmenion
One challenge that has been raised is the difficulty of moving client funds between platforms with the aim of getting a more suitable platform charge for their portfolio.
Bentley argues this responsibility partly sits with advisers, given the regulator has identified concerns with platform due diligence and retrofitting clients into a particular platform offering.
He says: “Most advisers don’t want to go through the hassle of migrating people from one platform to another.
“If the technology would allow business to be moved very simply between platforms then customers might be encouraged to say they want their money moved to a cheaper platform if they can do it at the flick of a switch.”
Candid Financial Advice director Justin Modray says clients can save “significant amounts” by switching but some platforms charge significant fees for in-specie transfers.
Modray says some clients his firm has taken on from Bestinvest have had to pay more than £1,000 in Bestinvest in-specie or dealing fees to move to another platform.
He says: “In-specie transfers still take far too long, despite being a relatively simple process. The sooner the industry implements a standard electronic system for in-specie transfers, the better.”
For Polson, where a client is advised, the dynamic between adviser and client is more important than a potentially cheaper platform charge.
He says: “The quality of the advice and of that relationship will always trump 5 basis points here or there.
“There are occasions where people can make a big difference – a 20bps spread on a £1m portfolio is enough to get excited about. But most platforms, most of the time, are within a reasonable tolerance of one another. The big exception is fixed fees for larger portfolio sizes. It is still ridiculously slow and cumbersome to switch and the more we get automated, the better. Few adviser platforms charge exit fees, unlike in the direct market in which exit fees are rife.”
Adviser view: Robert Reid, managing director, Syndaxi Chartered Financial Planning
Being able to move on from a platform is a key information set and should not be ignored. Where investments are recommended that are not readily available on other platforms, due warning has to be given as in-specie transfers will not be possible.
In essence, transparency that delivers no surprises must be the aim and currently it’s difficult to always be sure that all charges are clear and not misleading.
I am not suggesting that cheapest is best – far from it – but we need to make it clear what it costs to arrive at, stay on or leave a platform. That’s an objective all advisers need to achieve as well as determine if a platform is needed at all.
Novia: ATS flat fee example is ‘unrealistic’
Novia chief executive Bill Vasilieff says he is not against fixed fees but objects to the “widely held misconception” that fixed fees are cheaper, particularly for the majority of mass affluent platform clients.
Novia’s mean average client has a portfolio of approximately £110,000 to £120,000. Its median average client has a fund of around £60,000.
Last week Alliance Trust Savings argued an investor paying a flat fee of £10 on a £150,000 investment – assuming 5 per cent growth each year and a 0.8 per cent ongoing fund charge – would be around £20,000 better off after 20 years than with a platform charging 0.35 per cent each month.
But Vasilieff calls this model “unrealistic” as it is based on a basic Isa investment rather than a wrap. He says if the ATS charging model were applied to Novia’s assets, the average charge would be 46 basis points against Novia’s average of just under 35bps.