The problem with platforms (is that everyone loves them).

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Platforms are a relatively new but significant and growing distribution channel. The platform service provider market has doubled since 2013 from £250bn to £500bnassets under administration (AUA). This growth in AUA has been driven by rising markets and increasing levels of investment. More consumers are using platforms, with an increase of around 2.2 million more retail customer accounts between 2013 and2017.1 Platform revenue from retail consumers reached £1.3bn in 2017, up from £750m in 2013.

So begins the FCA’s interim market study on investment platforms , published last month. It finds a market that is generally delivering for consumers. However it identifies five issues that where platforms can fail us.

  • Switching between platforms can be difficult.
  • Shopping around can be difficult.
  • The risks and expected returns of model portfolios with similar risk labels are unclear.
  • Consumers may be missing out by holding too much cash.
  • So-called “orphan clients” who were previously advised but no longer have any relationship with a financial adviser face higher charges and lower service

Many of these issues have been covered in this blog recently. For instance I reported how Hargreaves Lansdown are making an eye-watering 48% margin on cash holdings and expect this margin to increase to nearly 70% as interest rates rise (and distributed interest doesn’t).

Net revenue on Cash increased by 15% to £42.1million (2017: £36.6m) as increased cash levels offset a slight decline in the net interest margin to 48bps (2017: 49bps). This was in line with our communicated expectations at the Interim results announced in February 2018 that margins would be within a 40 to 50bps range. Cash accounts for 10% of the average AUA (2017: 11%). At the start of the year the Bank of England base rate was 0.25% before being increased to 0.50% in November 2017.

With the majority of clients’ SIPP money placed on rolling 13 month term deposits, and non-SIPP money on terms of up to 95 days, the full impact of the rate rise takes over a year to flow through. Following the base rate change to 0.75% on 2 August 2018 and assuming no further rate changes, we anticipate the cash interest margin for the 2019 financial year will be in the range of 60bps to70bps. Cash AUA at the end of 2018 was £9.6 billion (2017: £8.1bn).

I print this in full because these are the exact words that appear in the HL preliminary results (p6). 

What concerns me is the impunity that HL feel they have to consumer regulation. That they can actually boast that customers in cash (representing more than 10% of platform assets) can deliver such mighty returns to shareholders suggests a brazen arrogance that needs addressing.


The FCA fully understand the problems they are identifying

Take these additional issues raised later in the paper

  • Platforms employ commercial practices which may restrict fund managers ’ incentives or ability to offer fund discounts to competitor platforms, and this may reduce competition on fund discounts.
  • Platforms could improve how they present fund charges at different stages of the consumer’s decision making

The report lays out a number of initiatives that – if implemented – would lead to platform customers getting better deals and better information. The issue is not that the FCA don’t know what is right, the issue is whether they can enforce change. I suspect that they need some encouragement and that will not come from within the platform industry


Who can address these platform problems?

A theme of the FCA’s interim report is that platform customers are generally happy. This is something I know to be true. Customers of the largest advised platform (St James Place) and of the largest non-advised or D2C customers are very happy indeed. They are treated with kid gloves, made to feel special and generally tickled out of their money like trout.

Customer satisfaction levels are generally a poor indicator of long-term value for money but a good indicator of short-term profitability. Both HL and SJP are extremely profitable and both are now stalwarts of the FTSE 100.

The impression the report gives is of deference to this success rather than concern about potential customer detriment. “kid gloves – iron fist” doesn’t seem an appropriate formulation.


Where SJP and HL lead…

My concern is that despite murmurings from regulators , other platform providers and even the financial advisers who support these platforms, there is no inclination within the wealth management industry to challenge the hegemony or the margins of HL and SJP.

They appear to provide cover for smaller platforms who can point to their larger rivals with the phrase “we’re not as bad as them” or perhaps “we’re only following SJP/HL”. I hear a lot of bad practice justified in this way. If the FCA is serious about driving down costs and improving completion it has got to get a lot tougher on enforcing better practice.


Dissenting voices

There are independent voices – the Laing Cat and Boring Money are both asking the right questions. But their research is primarily being purchased by platform managers, regulators and advisers.

The challenge of genuine disruption comes from outside the bubble, not within.

It is only the FCA that can properly address the problems of platforms and they cannot do so, by accepting consumer sentiment as an endorsement of platform success.

The fact is that platforms are way too expensive, too opaque and afford advisers an opportunity to milk clients unmercifully.

All too often, regulation catches up with the problem, after the event. The FCA appear to have identified platform problems “in real time”.

In due course, the true cost of the problems identified will feed through to poor outcomes.

  • You cannot employ a 4% drawdown rate and pay 3% in charges.
  • You cannot have over 10% of your platform in cash and boast about anticipated margins of 60-70% on that money.
  • You cannot charge clients who have lost their clients more for less.

We need dissenting voices that do not accept that contented clients are necessarily getting a good deal. I have worked in an occupational pensions industry that has accepted poor value for money for decades and has been happy to do so – such was the marketing skill of those who stripped funds of their returns, while we chugged round Britain on corporate beanos.

I see the same thing happening in the platform market and I’m going to do everything I can to ensure that platform customers are smiling, not because they are being treated with kid gloves, but because they are getting value for money from the platforms they employ.

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There may be trouble ahead….

 

 

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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3 Responses to The problem with platforms (is that everyone loves them).

  1. Kevin Bailey says:

    Henry. I agree with the objective of ensuring clients receive value for money. That however doesn’t necessarily mean cheapest is best nor that it represents VFM when service is atrocious or flexibility and accessibility are restricted. Of the five points raised by FCA and as highlighted above I would suggest:

    >>Switching between platforms can be difficult.

    Yes but not necessarily the fault of platforms;, this is more to do with fund managers’ abilities to amend the nominee which can take months to achieve. Something the FCA needs to take action on with the assistance of platforms reporting on the worse offenders.

    >>Shopping around can be difficult.

    Not sure this is so. There are many comparison services such as offered by Boring Money for those investors that want to go it alone and take the “DIY” approach. Those that go the advised and specifically the independent route should have had the “shopping around bit” done for them.

    >>The risks and expected returns of model portfolios with similar risk labels are unclear.

    Totally agree but this is not necessarily a platform issue as the matter is true of all descriptors when identifying associated risk as the majority of definitions are very much subjective. For example, my definition of balanced might be adventurous to you or vice versa. Better to identify the objective of the portfolio and confirm the risks associated. This is something discretionary fund managers and advisers need to determine with the assistance of the FCA in order to ensure the consistent approach you are after.

    >>Consumers may be missing out by holding too much cash.

    Generally I would agree but sometimes a phased investment may be more appropriate which then necessitates keeping cash. Important to identify why cash is kept as it may also be an alternative to gilts and other fixed interest components which look as though they’re set to provide negative returns in the short term (at least here in the UK).

    I suspect the disruption to the platform world you are looking for will not come from the regulator but rather from a software provider that can use all of its marketing and purchasing power to reduce the ongoing cost of platforms and fund manager fees however as Fidelity is proving in the US, zero costed funds may not be as cheap as you would first think.

    Liked by 1 person

  2. henry tapper says:

    Vanguard are the disruptor in chief IOM. However simple retirement saving plans which offer easy drawdown (like Pension Bee) are pretty good, I find most platforms overwhelming!

    Liked by 1 person

  3. henry tapper says:

    IMO not Isle of Man!

    Liked by 1 person

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