Advisers are being questioned about fee discounts they have in place with platforms as part of a Financial Conduct Authority (FCA) market study.
The regulator has asked a series of questions to both platform providers and advisers about pricing strategy, the way discounts are negotiated, and whether the client ultimately benefits from these.
When New Model Adviser® asked platforms last year whether they offer discounted deals to different advice firms, only Transact said it did not.
A survey seen by New Model Adviser® which the FCA recently sent out to platform companies as part of its platform study, contained the following questions on fees:
- What is your overall pricing strategy?
- What discounts do you offer to advice firms and what basis are they offered on?
- Are orphan clients are charged differently to advised clients?
According to a separate survey sent to networks and also seen by New Model Adviser®, some of the key questions for these firms are:
- What role do platforms play in facilitating your charges?
- If there are efficiency savings from using platforms, are these passed on to clients in the form of lower fees?
Networks were also asked if they vary advisers’ charges depending on:
- the platform used for certain specific investments;
- whether they have obtained any discounts from the platform fees for their clients.
On top of this networks need to provide a breakdown of initial, ongoing, hourly and any other charges for the last three years.
One figure from a major platform said the biggest issue facing the regulator was whether clients are missing out on the most suitable proposition.
They said some deals are based on 'structured hurdle rates', where advice firms receive a discount on platform fees provided assets do not drop below a certain level.
‘The firm does its client reviews and says “for this batch of platform clients this product is no longer suitable so I need to move them, but if I do I will then drop below the rate where all my clients get a discount. I therefore won’t move them because it is not in the clients’ best interest.”
‘That cannot really happen. Those discounts cannot be based on assets fluctuating in any way.’
Consultant Phil Young, managing partner of Zero Support, pointed out some other competition issues that can arise from the current way platforms fees are negotiated.
‘Historically, some advisers have negotiated harder than others on platform price. Some advisers go soft on cost negotiation as they enjoy the relationship with their platform which may have given a lot of peripheral help and training over the years.
‘Also, we have ended up with the strange situation where in some instances a client of a larger firm (in theory stronger negotiating position) is paying a higher fee for the same platform than clients of a smaller firm. This will always raise questions,’ said Young.
Not everyone believed the FCA was looking in right place though. Mike Barrett, consulting director at the Lang Cat consultancy, pointed out the apparent lack of coherence between what the FCA is asking platforms and advice firms to do when it comes to negotiating fees.
‘We see most platforms will knock off a reasonable chunk of basis points on the price for larger firms. I suspect for some of the larger platforms a good proportion of its top 50 firms will be on a special deal,' Barrett said.
‘From a client point of view it is good news. What is the difference between this and what the FCA is expecting platforms to do [in terms of negotiating prices] with asset managers?’
Fundscape chief executive Bella Caridade-Ferreira said preferential deals are not being hidden and are helpful to the market.
‘If [the FCA] wants a completely agnostic service where size makes no difference then you cannot do it in a commercial format.
'A platform needs to have sustainable assets and flows and strong business on its books. It needs to not be reliant on lots of small business that could go belly up any day.
‘The FCA obviously thinks there are some preferential deals being done but no one is hiding any of that,’ said Caridade-Ferreira.
Innes Miller, director at consulting firm Scydonia, also questioned if delving this deep into fees would lead to the FCA becoming a different type of regulator.
‘This is where it starts to become a pricing regulator and it said it never wanted to be a pricing regulator in this market,’ Miller.
However, Miller accepted too much variance in the way negotiations are done could be a hinder competition in the market.
The FCA declined to comment on the survey. It pointed to the terms of reference document for the study, which stated fees would feature.
The document stated: ‘Advisers may…have bargaining power and influence regarding platform fees and services, which in turn may be passed onto investors if competition is working effectively'.
It said it will consider how advisers select and use platforms, how platforms compete to win business from advisers and the competitive pressure advisers exert on platforms. This will include adviser firms which white label a platform, or use their own platform.
‘We will…consider whether advisers pass the benefits of competition between platforms onto investors in the form of lower adviser and platform fees,' it said.