Yellow cards but no penalties: Andy Bell's platform study verdict

AJ Bell chief executive Andy Bell picks apart the FCA's platform market study, and ends up asking whether the platform industry should learn from a certain island-based reality TV show...

The nineteenth year of the twenty first century may be remembered for lots of things.  A great World Cup in which England successfully exceeded very low expectations; a scorching summer to rival 1976; political chaos or a girl on Love Island who is the namesake of her famous EastEnders dad. I doubt it will be remembered for the Investment Platforms Market Study though. 

Now don’t get me wrong, that is not a criticism of the Financial Conduct Authority (FCA). Good referees should go about their business quietly and largely unnoticed. The FCA is no Néstor Pitana, the wannabe thespian and referee who ruined Croatia’s dreams in the World Cup final.

While no industry is perfect, most of us in the inner sanctum felt a few steely glares from the regulator and maybe a yellow card or two would do the trick. That is exactly what the FCA, to its credit, has chosen to do. 

In true Gary Lineker style, or Caroline Flack if you are from the Love Island camp, let’s pick the bones from this 110 page report. 

The nineteenth year of the twenty first century may be remembered for lots of things.  A great World Cup in which England successfully exceeded very low expectations; a scorching summer to rival 1976; political chaos or a girl on Love Island who is the namesake of her famous EastEnders dad. I doubt it will be remembered for the Investment Platforms Market Study though. 

Now don’t get me wrong, that is not a criticism of the Financial Conduct Authority (FCA). Good referees should go about their business quietly and largely unnoticed. The FCA is no Néstor Pitana, the wannabe thespian and referee who ruined Croatia’s dreams in the World Cup final.

While no industry is perfect, most of us in the inner sanctum felt a few steely glares from the regulator and maybe a yellow card or two would do the trick. That is exactly what the FCA, to its credit, has chosen to do. 

In true Gary Lineker style, or Caroline Flack if you are from the Love Island camp, let’s pick the bones from this 110 page report. 

Competition

The FCA found platforms are popular with investors, and competition is working well in some areas.   It has no widespread competition concerns and did not find any evidence of sustained excess profitability. In fact the regulator noted many platforms are loss making. 

Scratch beneath the surface of these statements and there are some very interesting findings.

The platform industry has a plethora of different charging structures.  I always look at pricing as a choice between simplicity and fairness.  A pricing structure can’t be both.  In the main, most platforms have opted for a menu-based charging structure (more fair than simple) which means, as the FCA concurs, meaning pricing comparisons can be difficult.

As an industry full of clever people, we are all adept at creating scenarios where our menu-based charging structure looks to be the cheapest in the market.  To compensate, research consultancies then come up with a range of scenarios and prepare beautiful heat maps showing which platform is cheapest for each type of customer.

To the credit of the FCA, it has cut through all of this noise and just focused on each platform’s revenue margin.  That is the amount of revenue each platform makes in a year from each £ of assets under administration (AUA).

In 2016, this ranged from the cheapest at 22bps to the dearest at 54bps.  That means the dearest is almost two and a half times the price of the cheapest. None of us can bear those customers who know the price of everything and the value of nothing.  But I also know that if ASDA shaves 10p off the price of a bottle of milk, my mum will put an extra three miles on her shopping journey to take advantage.  Investors say that price is most important when it comes to choosing a platform, but their actions do not bear this out. 

 

Downward pressure

The good news is there is downward pressure on platform charges, though maybe not as much as the FCA would like.  In 2016, AJ Bell’s revenue margin for platform business was 22bps and is tracking 20.5bps this year.     

The FCA’s focus should be on encouraging, rather than forcing, platforms to have online calculators that convert charges into monetary terms, maybe on a year 1 and year 2 basis. 

Historically, charges disclosure has confused rather than clarified. Tell someone their retirement fund will be £18,000 less if they pay 0.5% a year in extra charges and you will get a blank look.  Tell them their platform charge will be £450 a year but they could pay £185 if they shop around and you get a different reaction.

The FCA may also consider requiring platforms to publish their revenue margin, preferably as revenue per £100,000 of AUA, rather than a basis points measure. This will be a simple starting point for anyone looking to compare prices.

The regulator has indicated it thinks the new disclosure rules as required by Mifid II and Priips will help to deal with confusion over charges. I am not as confident. If Mifid II or Priips is the answer, then I fear that the wrong question is being asked.

While competition was undoubtedly the main focus of this review, there were several other issues the interim report touched on.

Switching

Switching was the area where I was most hopeful for regulatory intervention, with teeth.  Without stating the obvious, any switch between platforms requires the cooperation of both platforms.  Most of the successful platforms are net receivers of switches and therefore have every incentive to speed up the process.  But it takes two to tango.

The FCA’s approach of watching from the dugout on this one is sensible, leaving it to the industry to develop its own timescales and standards, which it is currently doing. However, I fear some platforms may need to feel the hot breath of the FCA on their neck to make sure we get to a sensible position in a reasonable timeframe.

One area where more clarity is needed is switches between advised platforms.  Advisers are concerned the advice to switch involves a significant amount of work that the client is often not willing to pay for, even though it would almost certainly lead to a reduction in charges and no change to the underlying wrappers or investments. 

The FCA has challenged the view that the extra work for the adviser is onerous and questioned what additional work is required over and above the annual suitability test that advisers should be carrying out in any event. There is clearly a difference in expectations and we welcome the FCA’s suggestion that further guidance in this area will follow.

Exit fees

Exit fees are another issue we are keen to explore further with the FCA. We need to make sure we are all on the same page when talking about exit fees.  The platforms on both sides of the switch have to carry out work. If platforms can’t charge for this work then the costs will have to be subsidised by other customers.

Pension switches are more complex than switches between ISAs or dealing/general investment accounts.  In-specie switches, where assets are transferred rather than cash, are significantly more difficult and labour intensive than cash only switches.   

Exit charges that unfairly penalise a customer or look to recoup acquisition expenses should be banned. Platforms should however be able to cover the reasonable costs of switching and one can only hope that as the switching process becomes more automated, the need for these charges will in any event fall away.

Measures to protect orphan clients

Orphan clients are those that use an advised platform but where there is no appointed adviser.  Most adviser platforms find these orphan customers a real challenge. 

Adviser platforms are geared up to deal with advised customers, while orphan customers are execution-only and often have to be managed as an exception.  My experience is that some orphaned customers are in no rush to leave an advised platform.  Why would they? They are saving on the adviser charges and are often not willing to take control of their own investments by becoming a proper DIY investor.

I cannot speak for all advised platforms but I think most would agree orphan customers pose a regulatory risk and are operationally expensive to deal with. I suspect most platforms would gladly see these customers preferably appoint a new adviser or move to a DIY investment platform.  Any additional charges imposed on such customers are there partly to cover the additional administration costs and partly as a disincentive to remain as a customer of what is in essence an unsuitable platform.

Model portfolios

The FCA has raised concerns about the use of model portfolios, in particular ensuring the inherent risk levels are properly articulated and understood. Model portfolios are very popular with customers and are crucial to addressing the advice gap. Investors with sub £100,000 to invest, who have little or no knowledge of financial markets, find model portfolios a great way of putting together a sensible multi-asset investment solution.

An advised customer will go through a risk profiling questionnaire with their adviser, which gives an objective assessment of the level of risk the investor is willing to accept.  Typically, a model portfolio will then be recommended by the adviser, which has its risk rating matched to the customer’s level of risk.

Frustratingly for DIY platforms offering model portfolios, they are limited as to how much help they can provide their customers in identifying their risk appetite.  Customers can typically choose between the rather blandly named cautious, balanced and adventurous model portfolios.  However, if a DIY platform offers a self-help risk profiling tool then it is in danger of straying into providing a personal recommendation, which many are not willing to do.

The solution here is simple and in the gift of the FCA – a loosening of the regulatory reins on what is accepted as guidance, so providers can offer useful solutions to help DIY customers make investment decisions without straying into providing advice.  

Cash balances

The final area of FCA concern was in relation to the amount of cash held by D2C platform customers.

This is a key focus of the regulator’s concurrent Retirement Outcomes Review and the FCA is clearly sensitive, with some justification, to inertia leading to excessive amounts of cash being held by D2C customers. This isn’t seen to be an issue for advised platform customers, which, again, is a fair conclusion.  

To put this in context, the FCA found 8.8% of AUA is held in cash by D2C customers, compared to 3.9% of AUA for advised customers.

The Retirement Outcomes Review has unearthed some very poor outcomes involving drawdown customers leaving excessive funds in cash or cash-like funds. In the main, this was restricted to income drawdown policies with insurance companies rather than investment platforms.

The levels of cash held by D2C customers identified in the Platform Study is explainable.  D2C customers are encouraged to keep a cash balance to pay platform charges.  Many are in income drawdown and choose to keep two or three years’ pension in cash.  Dividends build up over time and there is a time lag between personal SIPP contributions being paid and the tax relief that follows some weeks later.

Also, some people choose to hold cash as a defensive investment stance or just to give flexibility to make new investments quickly. 

A few years ago, we introduced a dividend reinvestment option on the vast majority of our funds and shares.  At a stroke this reduced the average cash balance per customer. Maybe the FCA should encourage other D2C platforms to promote similar options. 

More generally, excessive amounts of cash held over a sustained period of time should be viewed by a D2C platform as a key risk of poor customer outcomes and all platforms should have a risk framework to manage such situations.

They think it’s all over….

…it is now! Well, except for the further consultation and final report. The referee gets a pat on the back. No one has been sent off and there is no need for VAR. Indeed, the platform market could learn a lesson or two from the parallel universe over in Mallorca.

Competition is not an issue in the Love Island villa - there is an abundance of beautiful people to choose from.  Switching is seamless, sometimes twice in a week; just ask Meg and Wes. 

There are no complaints about this portfolio of models and as for percentage of cash balances, we just need to find out where Charlie has got his £400 million stashed.

Which all-in-all probably leaves you with one extra platforms question on top of those asked by the FCA this week: do I really watch Love Island, or is this the work of Mrs Bell…? 

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