I published a blog over the weekend , which is rather better for the comments it’s attracted. Indeed there’s an argument to read the comments and ignore the blog!
The blog asked “what’s the point of platforms?”. I hadn’t expected it, but those commenting on the blog helped found me the answer?
One of the questions posed in these comments is who should pay for the tools with which an adviser does his job. If we consider the platform (and the various modellers that come with it) are being selected by the adviser as his/her tools, then the adviser’s “price” should include the cost of the platform and the tools.
But this is not how platforms are being presented to the public. Witness the oft-quoted (by me) table of costs published by New Model adviser.
It is now common practice to get clients to pay for the platform (the tool) on top of the adviser’s costs – not as part of them. Graham Bentley comments
The key point is platforms facilitate fee payments and consequently the customer experience remains as it was pre RDR, except now they’re paying 80% more fees. If asset managers (or platforms for that matter) were jacking up their prices to the same degree, many advisers would be up in arms. Pots and kettles spring to mind…
Graham’s comments are perhaps referring to the title of the New Model Adviser piece from which the table above is taken. The piece is entitled
The quote is from Phil Young , a favourite of this blog. I hope the piece’s author Jack Gilbert will forgive me for quoting Phil’s comment in full.
‘I have sat in meetings where people say: “We think adviser fees are going to come under pressure.” But in the next slide they said supply is going down and demand is going up. People sat in the room from outside the industry, are looking at it and saying “this doesn’t make any sense.”
‘The evidence is that advice fees are consistently going up. As much as we on the inside say they will come down, there is no evidence that this is happening at the moment. The normal metric of supply and demand suggests that is not going to carry on further forward. All the metrics suggest advice fees, if anything, could go higher.’
Since RDR, the cost of pure advice has risen from 43bps to 87bps. As the headline of this piece points out, 100bps is the new normal.
What does this mean to our savings?
By dividing the advice fee into two , and getting clients to pay not just for the advice, but for the tools of executing that advice, the adviser is doubling the rake. Not all the rake goes to him, but if the platform is limiting his exposure in terms of executional risk and time , then I think it’s right to consider the platform fee as part of the advisory cost.
Here is what one adviser (Darren Lloyd Thomas) has to say about the total rake from the advisory/platform cost pre and post RDR
‘If you run a like-for-like comparison on 300 bps initial plus a 50 bps ongoing charge, which was the standard approach, it decimates the investment,’ he said. ‘It takes over five years before 0 bps initial plus 100 bps ongoing becomes more expensive”
The comment is supposed to demonstrate that the customer is now getting a better deal from a 100bps advice charge. But the problem with the argument is that pension investments aren’t over 5 years, they are typically over 40 or more years (especially if advisers are taking over the decumulation (spending) period of the pension policy.
We know that 100pbs (1%) pa reduces the size of a pension pot over a 40 year period by 27% – if that is what an adviser is charging – over the benchmark – the non-advised workplace pension rate, then he has a lot of catching up to do.
Put simply, would you bet a quarter of your retirement funds on the promise of an IFA to make that money up and pay on top as well?
That is the bet that an IFA charging 100bps in platform and advisory costs – is asking us to take’ Can an IFA deliver value over the cost of buying and holding a fund through the term of the investment?
Dumb buyers or duped buyers?
Mike Barrett of the Lang Cat, makes a point I’ve heard from many IFAs, namely, that relative to St James Place and Hargreaves Lansdown – they are cheap.
‘Consumers are still not particularly price-sensitive. The dominant direct-to-consumer platform is Hargreaves Lansdown, which charges an above-average platform price. The dominant advice proposition at St James’s Place also charges well above average total costs.’
This argument is incendiary. The FCA and the CMA should read it again and again. There is no justification for using the two behemoths as a financial shield for over charging. Just because SJP and HL are way too expensive, doesn’t mean everyone else should be pillaging in their wake.
Let’s remind ourselves again of the OFT’s comment in 2014.
The OFT required workplace savers to be protected by the IGCs and by Trustees. The FCA went further and slammed on a charge cap and a ban on consultancy charging (where the member picked up the employer’s costs).
What happens when you get dumb buyers, is you get duped buyers and if IFAs can’t see the consequence of duping buyers, then they aren’t watching.
Everyone’s a winner till it’s time to pay the bill.
Platforms exist to insert a layer of charges between an investor and their investment. https://t.co/DX06cfhEcC
— Paul Lewis (@paullewismoney) May 20, 2018
I am quite sure that is now how platforms started out, I am sure they started out as a means to provide a pensions dashboard, drive down fund management costs through aggregation and enable those who like to manage funds – to manage funds.
But that is what platforms have become – a means to layer and collect charges for advisers. Platform managers are well paid for the technology, fund managers have a centralised means of distribution (and can offload most of their client servicing obligations).
Everyone is a winner because the fund pays everyone!
Except it is not really the fund that’s paying is it? The debt is on the customer’s retirement income, and that debt won’t be revealed till it’s too late.