One of the great financial mysteries of Britain today is the success of fund platforms.
Last night, light was shed on their murky secrets by a high priest of their dark arts at a talk I attended in a dodge-spot in Berkshire. I happen to like this person (being gender specific might imperil the Chathamhousality of the event I am at). But if he had rolled up his trousers and worn a dodgy uniform, I would have felt more comfortable with his message!
Platform people have their own language and I was soon struggling. Apparently you don’t lose funds from your platform, you “seed ” them to a rival. If you want to swap your technology – you “replatform” – but more of this later on.
The central message was that platforms were likely to bring down the cost of ownership of equities (and presumably bonds) to the public. Currently – on a platform, you can expect around 2% of your wealth to disappear to the intermediaries between you and the assets into which your money is invested.
It would seem that this cost could fall to around 1.2% , though Mr priest man did admit that there was scope for the bottom to fall out of the platform allowing consumers to have what they have today at less than one tenth of the cost (I heard the number 15 followed by “basis points”).
I shook my head (in disbelief) when I heard these numbers- Mr priest man picked up on my body language and laughed nervously. I suspect he saw me revisiting the costs I pay for my workplace pension (0.35% in total). Stephen Tiley has (in comments below) told us what he’s paying in his SIPP. Direct investment, whether into , funds, ETFs or equities might provide us with lower costs still.
As this article confirms, it is now very hard to use a self-invested “directly invested” pension. If you use a SIPP, the chances are you are using a platform – and paying platform prices. Clearly the stakes are high on both sides.
Mr priest man has £11bn sitting on his platform, I am going to have a look at his company’s accounts – I suspect that they are stellar. I am sure that the four technology providers who manage the funds who have silly names like FNZ and GMBT and Blue something are also making a packet.
They charge 0.3% to marshall your funds around. Then there are discretionary fund managers who package funds up (like the montages you make on Instagram or Facebook) and then their are the financial advisers who help you choose which montage of funds, which platform and which tax wrapper you want.
In the deep distance, but no less deleterious to any prospects of investment growth you are likely to get, are the fund managers. They charge for their services and package up all the costs of their friends (see TTF blogs). The Priest Man looked knowingly at me when he mentioned the fund managers as the impact of their activities was not included in the 2%pa he had mentioned.
If you throw in the impact on performance of hidden charges to the Net Asset Value of your fund, I reckon the unlucky punter not investing with the likes of Vanguard could be well on his or her way to paying 3%pa, a number adjacent to the estimates of my friends Gina and Alan Miller.
Some years ago when I worked for Investment Solutions (now Mobius), I saw all this going on with wholesale (institutional) money. Unfortunately for my bonus, the margins weren’t as thick but the principle was the same. “Keep wrapping the onion in another layer of intermediation- keeps the light out and the charges in”.
I had curated my employer a strap line
“Portals for show- platforms for dough”
Unfortunately this was deemed a little edgy and not adopted. It hinted what I still suspect to be the case, that the portal (or as one of the audience called it – the porthole) , is simply window dressing. You see through the portal what the platform lets you see, and very nice it looks, but….
The Big Reveal!
Which brings me to the big reveal. WOW – at 3% pa – you are paying more for the privildge of having your money managed than you can expect in year on year growth on your investment!
Just why anyone would think that investing in a funds platform that – in a world where a four percent real return sounds a heroic target – takes 3% in charges- completely defeats me.
Platforms were the fund industry’s answer to the loss of commission (through the Retail Distribution Review). Instead of paying commission, we now pay management fees. Since everyone in the food chain wants to be a fund manager- everyone takes a bite out of your money on an “ad valorem” basis. BINGO – everyone wins but the punter who struggles to get a real return (or even a nominal return) on his investment).
The consumer now seems further away from the ownership of the assets into which he or she invests – than ever.
The RDR has spawned a mongrel child with 666 on its scalp,
So what of the future?
Well the future seems to be about something called re-platforming which – if I wasn’t going to be chatting to the High Priest over my cornflakes, I’d call the biggest churn since they set up the Milk Marketing Board.
Apparently re platforming will bring down prices though it looked like an expensive and risky game of musical chairs where the investor finds himself ultimately sitting on the floor.
I asked whether this might involve adopting genuinely transformative technology – as in the blockchain – but the High Priest Man thought that this was many years away and left me with the not encouraging message that “financial services are slow to adopt ground-breaking technology”.
If I was in this platform game, I wouldn’t want to change anything. No wonder Mark Polson (the Lang Cat), and Holly Mackay (boring money) are looking so pleased with themselves. Their gentle teasing of those in the game does just enough to maintain the status quo- without compromising their integrity!
Strap me in and platform me up!
Holly and Mark seem to be about the only people calling the platform people for the massive waste of money these things are. They are doing so in the nicest possible way.
If I could lift myself from the day job, I would really rip into platforms, their indulgent pricing structures and their absence of governance.
If ever there is an IGC to govern what is going on in platform land- put me on it! In the meantime- it’s wild west saloon time at the funds coral.