Fundless fund platforms?

demolish

Over the past fifteen years, new technology has brought us the fund platform, open architecture and unlimited choice. It has not brought us good fund governance and that’s what’s round the corner.

But we are about to find that the price of well governed funds is restricted choice and that means the end for the 250+ fund ranges we have got used to seeing when we look at the “full fund range” of most GPP (let alone GSIPP) providers.

Putting a fund on a fund platform is a simple business. You need an Investment Management Agreement with the Fund Manager, and you need a funds administration function to make sure the right money goes to the right people at the right time and errr….that’s it.

Whether the fund is doing what it says on the packet is nobody’s business but the adviser and the client’s.

This is broadly speaking the model that has driven the success of fund platforms – whether insured – (Skandia, Aviva, L&G ,Standard Life) or non-insured (Hargreaves Lansdowne,Co-Funds,Nucleus et al).

The yeast that raised the dough was and is advice.

Many people think that the funds platform model is the way forward for those managing wealth for later years and so long as there are advisers (and there are around 22,000 in the UK) there will be fund platforms, with fund governance conducted by the advisers.

But do the maths, the average adviser may be able to manage 50 clients meaning that about one million of the fifty million savers in the UK. Even were there demand for individual advice, there is insufficient capacity. 

I suspect that demand currently meets supply (which means we have an efficient market. It may be, as has happened in Australia, that as asset balances increase, the demand for self-managed ,semi advised or fully advised portfolio management services increases. But even were it to double, the vast majority of savings in this country will flow into non-advised solutions designed to be ok most of the time.

The dream of making us all our own CIO is over. It sided in the US around the turn of the century when firms like T Rowe Price work ip to the fact that despite 20 years of financial education programs, assets were being managed on 401k fund platforms much as they were at the outset of the programs.

To mis-quote Yeats “in this world, the best lack all conviction while the worst are filled with a passionate intensity”.Those zealots for the personal financial engagement agenda were often the most mis-guided in terms of execution.

The DWP and FCA seem determined not to be led down the path to a fully advised world. Yesterday Steve Webb demanded that the default solutions at retirement should not be into retail products. Reading the DWP Command Paper “Further Measures for Savers” it is absolutely clear that the DWP do not believe in mass-market advice. Nothing I have heard from the Treasury or the FCA suggests that they believe in mass-market advice, fund platforms and ligh-touch governance.

The alternative is the sturdy proposals on IGCs and Trustees to properly investigate what funds are doing, publish statements of investment principles for each fund, issue annual statements on the performance of each fund against its principles and a rigorous exploration of charges and costs. 

All these proposals have a cost. Trustees may be comfortable to go round the loop for the default and maybe a core range of risk-graded alternatives. But are they going to do this upwards of 250 times?

I very much doubt that any Qualifying Workplace Pension will be offering more than ten fund choices in a years time. Infact the trend will be towards the mono fund solution pioneered by NOW. NEST are reporting 98% of contribution flows to the default and while I expect more dispersion over time, the incidence of default usage isn’t likely to fall any time soon.

Since the costs of the governance have to be met out of the charge, it is likely that non-default funds (which are not subject to the cap) will be loaded heavily for this extra governance to a point where they look so un-competitive that they are virtually unused.

Fund platforms may have reached a high-water mark in terms of their diversity of offering. While I expect to continue to see unlimited choice in the advisory space, the workplace pension will see massive consolidation around the default , a couple of risk-graded alternative and the odd specialist fund for the ethical investor.

This will be as much the case in decumulation as accumulation. Fund managers looking at wealth managers and DFMs to manage out the long-tail of in-retirement savings look as if they will be locked out of mainstream product as they are from the savings phase.

Ultimately governance concentrates on things that can be measured and controlled- asset allocation,costs and due diligence on the manager’s capacity. It avoids things that it cannot control, skill-based factors that generate alpha but at the risk of things going tits-up.

There may be some appetite for risk within defaults, where trustees may be a little more ambitious, but even here , any solution that relies on subjective assessment is unlikely to be popular.

It is this limitation which may frustrate the engaged investor and drive them towards self-managed solutions. The advisory community already knows who these people are and will continue to cater for their needs, but their numbers are unlikely to be swollen by the auto-enrolled and I suspect that most in the squeezed middle will rely on IGCs and trustees to provide preferred solutions and avoid light-touch fund platforms as “rich-men’s playthings”.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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