Who should pay — the client or the adviser?
It will come as no surprise that advisers believe clients should pay for the platform. Most also think clients are the main beneficiaries of the platform. Platforum recently conducted research with advisers on the notion of value for fees. (See Katie Marriner’s excellent article on the findings in Money Marketing.)
It is a fractious debate. Yet I ought tip my hand: I agree with advisers. In most cases the investor should pay.
But before tucking in further to the topic, I have some news to share. I am leaving Platforum at the end of the year and passing the reins to Jeremy Fawcett. You can read the announcement on our website. In short, I have learned a lot while at Platforum, thanks to many of the readers of this email. For that I am extremely grateful. The time has come for me to branch out on my own. I will gladly keep anyone interested posted on my developments. Platforum will be in very capable hands. Jeremy has been a senior member of the team for six years, most recently as research director.
Right, back to platforms and who should pay… I wish it were different. Platform charges would surely come down if advisers paid for the platform. The difference between 20 bps and 25 bps on a £100k portfolio matters a lot less to the individual than when it is aggregated in a financial adviser’s business.
Our back of the fag packet estimate of average AUA for financial advice firms is £100m. You can be sure that if financial advice firms were forking out over £350k a year for a platform, they would use their leverage on platform providers and push hard for a better rate. A £50k discount would make a difference to the bottom line.
Moreover I agree with advisers that the investor is the main beneficiary of the platform. It is the investor who benefits from the tax wrappers and custody of assets.
There are many examples of financial advisory firms paying for the platform (and yes, I acknowledge that in the end the investor pays…). Larger firms tend to pay the platform fee, notably TilneyBestinvest, AFH, SJP, among others. The reasons include:
- Vertically integrated propositions are able to capture value across the supply chain.
- The platform charges the firm can negotiate are probably lower (thereby increasing the wallet share for the adviser/DFM as against the platform).
- Investment business is concentrated on one platform, giving the firm buying-power and the ability to negotiate better rates with asset managers.
- Processes are simpler, leading to a slicker organisation, cheaper administration and less training.
But the adviser market will continue to split into the large advisers who can buy these deals because they have sufficient AUA, and the smaller advisers who don’t. Our recent Adviser Market Size and Structure report estimated that 89% of advice firms have five or fewer financial advisers. This is a heavily fragmented market.
New entrants will put pressure on the incumbent players. Hubwise and Embark are currently undercutting the competition or have plans to do so. How will financial advisers justify recommending a platform charging 35 bps to a client with a fairly straightforward portfolio when they could just as easily recommend an equivalent one charging 20 bps?
Prices will come down. Scale and scalability will become even more important. Efficient processes are critical to scalability. Most of the big players are working hard to make their operations scalable.
Will they succeed? That, as always, is the critical question. And I have an answer.
I am preparing my remarks for Platforum annual conference on October 10th at etc. venues St Paul’s (we have a few tickets left, register here). The theme is: “Can a leopard change its spots?” In other words, can players in the industry evolve with new times?
Price is only one force exerting pressure on retail investment distribution. I look forward to seeing many of you next week as we discuss this and other tricky topics affecting the future of our industry.