It’s a great shame that more people in the institutional pensions world are not better acquainted with Ian McKenna. He is a heretic – a disruptor – who asks the questions what we do not want to be asked. Right now he is asking whether the fund platform is needed by the consumer and whether the distributive ledger (aka block chain) can reduce the cost of investment administration – allowing investors to interact with their money without intermediation.
Why this is heresy, is that the funds platform has become the means by which the thriving wealth and advisory industry gets paid. How and what advisers gets paid is a sensitive matter as advisers prepare their disclosures under the new consumer duty. Having an industry leader claiming that the industry is turning a blind-eye to technology that could make for a better consumer experience is indeed heresy.
Will blockchain end investment platforms as we know them?
In an article published in Financial Adviser, McKenna is reported telling an audience
“Most of the industry is overpaying for its platform service,- once asset managers start to put their fund registers on blockchain, fees will become far more transparent and prompt the question – ‘why pay for a platform?’”
The industry’s response is “we’ve heard all this before” and indeed there have been pre-pandemic murmurings from fund managers.
But without intervention, the relationship between providers and advisers will continue to revolve around platforms which allow advisers to be paid a small percentage of assets under their advice. So important is this mechanism of sharing the client’s return become, that one annuity provider has recently launched a product that makes the annuity an asset under advice.
Since the advisory fee is paid as a percentage of assets on the platform , it is thought of by many consumers as a commission. In a recent post on valuing advice on the MoneyMail website, I was shocked to find so many comments referring to advisory fees as “commissions”. Many comments claimed that they were being charged for services they didn’t receive. The Times’ Ali Hussain picked up on this point over the weekend
In this case, the adviser had got legacy commission from a product. The money had been paid to the adviser out of funds on a platform , the client claimed he had no knowledge of this. Despite the £6,000 being a commission, there is still considerable confusion about the distinction between fees and commission.
This is the kind of dispute that troubles regulators.
Platforms are the way advisers get paid
Paying for advice with reference to the assets on the adviser’s investment platform is imperfect but it works. That seems to be the conclusion of most fund managers who rely on advisors to distribute their products. Advisers are understandably nervous of any change that disturbs what works but the FCA may not see things this way.
It is the advice not the platform that the client values – according to Ian McKenna, but it is the platform that collects the advisory fees.
Moving to a block chain solution would create further problems for advisers. Firstly, advisory fees would be charged for directly and would need to be paid directly (from a client’s bank account). Secondly, if they were hypothecated to advice rather than fund management , then there is a risk that advisory fees would be considered VAT-able – effectively increasing the cost of advice by 20%.
Financial advice currently enjoys VAT free status when relating to a regulated product. Most advice offered independently of products is subject to VAT (for instance advice provided to pension trustees on funding).
Is the demise of the investment platform inevitable?
McKenna says it is.
“Platform fees will be sub-1 basis point within the next seven to 10 years or sooner. There will be no margin left. The smart ones, like Fidelity, have partnered,”
“We can’t keep acting like turkeys. We’ve had 25 years [when platforms were first invented] to prepare for this. Frankly as an industry, we’ve sat on our hands.”
Until recently , I’d have characterised Ian as a John the Baptist – crying in the wilderness. But since the intervention of the FCA’s Consumer Duty, I am beginning to think his views may be being listened to by ears more important than mine.
Blockchain is a fantastic idea which has been around as long as platforms. To the extent that the public know anything about it, they think of toxic crypto currencies which blow up and therefore should be avoided. Blockchain is a far better way of recording ownership and trading assets, quicker and cheaper. But you still need a way of valuing and viewing a whole portfolio, aka a platform. Platforms switching to blockchain technology is a far better way to manage a portfolio than clients a DIY approach.
Also, commissions have not been banned! Stockbrokers charge commission for trading and there are other examples. Advisers being paid commission by product providers is banned. All other examples of commission are alive and well. Most bad publicity for fees without service is generated by SJP. Their salesmen charge a fee of 0.5% pa and rarely seem to provide any ongoing service.
There are a number of barriers to this nirvana. The promise of blockchain is clearly evident but you are asking turkeys to vote for Christmas. What is in it for fund managers to put their Holdings register on the blockchain? A large technology project that delivers no benefit to the fund manager. Why isn’t the LSE on the blockchain. All shares in one place would wipe out brokers trading platforms etc.
In my opinion and it has been such for the last 15 years since blockchain and smart contracts first appeared is that until it is legislated no one will change the status quo. Norway has had a central register of shares since 2005. All changes of ownership take place on that central register. It didn’t need blockchain, it needed mandating by the government.
Consumer Duty is great but it fiddles at the edges to catch rogues in the industry. Fundamental change like this will be fought by the FS lobbies in government and will not take off.
Ps. Good for clickbait but not much chance of anything changing anytime soon