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.