I enjoyed reading the FCA’s Terms of Reference for its Platform Market Study, it posed many questions and I’m looking forward to the answers. Few investors properly understand what platforms are , what they do and how much they cost. The aim of the study according to the FCA’s Christopher Woolard is tied up in this statement.
Platforms have the potential to generate significant benefits for consumers and we want to ensure consumers are receiving these benefits in practice.
The “significant benefits of platforms to consumers”
As far as consumers are concerned, the benefits of platforms are various and there is little consensus on what they’re really bringing to the party.
Platforum Consumer Insights, Figure 42 (January 2017)
I would read into these findings that when pressed, more people would point to “security” than “feeling in control” but that the general sense of having investments organised is what makes the packaging of funds on a platform – so attractive.
I don’t see this as a financial benefit, it’s the benefit of empowerment. Platforms empower consumers to “pay less in fees than using a professional adviser and to manage investments independently of an adviser”. These are the financial benefits deriving from platforms.
The least valuable aspects of platforms are the tools and information they offer. These are still valued but they are the means to an end – the end is first of all control and security and secondly money saving. The capacity to be a funds expert , to move money and to have online valuations is only contributory to the main event.
Why and how people buy platforms.
From the evidence selected by the FCA, we can see those investing in platforms as predominately middle aged or in early retirement.
age bands of platform users (platforum)
They are income rich
household income of platform users (platforum)
And wealthy
Net disposable capital of platform users (platforum)
This is precisely the demographic that made the Equitable Life and were so let down by the Equitable. This market study is exploring precisely the issues that the FSA should have been looking at in the 1990s.
If you were to ask the Equitable policyholders before its crash why they invested with that Society, I would be surprised if the answers were much different to those given for choosing platforms (online services excepted)
why people chose platforms (platforum)
And indeed, Hargreaves Lansdowne has the same trust from platform users as the Equitable had in the day.
non advised assets on platforms (£bn)
As in the 1990s, one non-advised provider dominates the sector that challenges conventional advised propositions.
Advised assets on platforms (£bn)
I am not saying that Hargreaves Lansdown has any of the structural flaws of the Equitable, but I would guess that the comparison between the two has been noted by the FCA.
Who wins from platforms?
Platforms are a profitable business (look at Hargreaves Lansdown’s share price). They are the means that fund managers get their products to the wealthy and they are the way that technology providers have skin in the assets game.
There is a cost to all this and the security and control that platforms offer, comes at a price. The FCA survey mentions the word “value” 49 times. Christopher Woollard must be wondering just how to measure the value that all this money spent on platforms brings.
We can safely assume that the financial services industry is doing very nicely out of platforms.
But at a time when Vanguard are under-cutting the non-advised price of Hargreaves Lansdown by more than half, can Woollard be sure that platforms are really “passing on the benefits to the consumer in practice”?
I suspect that it will be a lot harder to intervene in this market than we might think. The demographic that platforms serve is the Equitable demographic, now the Hargreaves Lansdown customer base. These people do not want Government protection until the balloon bursts, then they form Action Groups and lobby for their money back. It is a particularly insidious form of Moral Hazard.
But precisely for this reason, I would urge Woollard and his team to press on and really test whether these platforms are providing value, or whether they have become the means of ensuring wealth is redistributed from the mass affluent to the financial services industry.
Great article – thanks.
I threatened to leave my well known sipp platform last week and was then offered the old flat fee structure rather than the new 0.25% charge. Platforms can help to bring clarity over costs if they can clearly disaggregate fees in the same way Expedia has helped do.
Henry, for those of us giving advice in the early 1970’s and being regularly approached to join Equitable I can tell you that the truth is a little different to the perception.
A significant reason for the habit of using Equitable was the argument that they were low cost because they paid no commission.
In reality they paid “volume related salaries” Cleaverly using the superficial bias into real action and undeserved market share. (The timing of the MPs AVC exit from Equitable is suspicious. )
My antidote with accountants was to carried around with me the Equitable annual report in which they disclosed the highest paid staff who interestingly was not on the Board. In the 70’s a salary of £600,000 was unusually good but what the top salesman at Equitable was paid ( according to their Annual Report)
We see it again now the cheap shots at advisers being paid, how to avoid paying them and robo advice. It’s all bollocks, the reality is that nothing happens until someone sells.
Servicing a sale is what the institutions want to control and denying the saleman the budget to service the sale in the long term while distancing themselves from the sale itself. The IFA profession has no common voice so they will not win against the institution or the State. Innovation in Pensions from those facing the customer and changing behaviour are discouraged from pioneering activity and regularly get arrows in the back.
The State sponsered free “Guidance” clearly is a waste of money even the Pensions Minister has trouble with Guidance/Advice concept and anyone can do a “Netflix” at destroying competition given enough loan capital to prop up a yet another Castle Plan in disguise and who is to say that £1.2b will be the final number?
The money has to go somewhere John! You do your bit to make sure it is put to productive use but I worry about the leakage in both retail and institutional sectors. As Robert says (below), we should have found better ways to manage the money by now!
In the Internert age every other business sector has benefitted from disintermediation as technology allows buyers to interact directly with producers. Who uses a travel agent to buy an air ticket for easyJet?
Finance is the stand out exception and that is entirely because the Government has forced savings into tax wrappers that have to be provided by an intermediary – the platform.
Platforms hinder new entrants and add 100% to the cost of saving.
I think the idea that an infinite number of monkeys can eventually generate Shakespeare dispels the myth of the linking of internet and creativity
The internet and platforms should enhance the quality of service by producing cash flows and tax calculations showing net benefits and optimum routes to wealth preservation using algorithms to cut down the work with the calculator.
However hoping that they can personalise is doubtful as they do have issues with debate based on data & information guided by knowledge,
Trust and design visualisation based on a goal or a life style requirement leading to efficient implementation then keeping that plan on track as the rules change will never be taken over by a system designed for the average.
Clinging to the idea of work based funding needs to recognise that many jobs last 4 years not 40
Frank Field keen on consolidation of all these 4 year pots – though it’s not clear who will clear money. SIPPS are fine for wealthy but look at those graphs and they show that these platforms and their tools are not much used outside the wealthy, high income minority who frequent wealth managers. In short – not Frank’s kind of solution – we probably need a much simpler answer for the lumpen (like me)