The recent FCA investment platform study interim paper was very keen on switching but it may also have come against what you might call the untidiness of the advised market.
The paper itself noted one of those obstacles certainly in terms of advised portfolios – the use of legacy platforms and some existing clients potentially not benefiting from updated buy lists.
The paper said: “Advisers update their platform lists for new investments over time, but not many advisers switch existing investments as the process is complicated. This means that even if there are better options, which advisers use for new clients, they rarely switch existing investments across platforms. Many advisers in our sample charge an extra fee for switching on top of their ongoing advice fee, which can cancel out the potential benefit of lower platform fees and act as an additional barrier.”
Switching costs on advised platforms
Advisers may also be interested in the FCA’s choice of words in another passage where it suggests that the legacy platform may meet a ‘relatively low requirement to be suitable for the client’.
It says: “High switching costs may mean that existing investments are left on more expensive platforms. While advisers update the list of platforms they consider for new investments over time, the level of switching for existing investments is very low.
“The main reason is the length of time it takes to switch, due to the complexity of the process and the lack of standardisation. As a result, provided the platform continues to meet relatively low requirements to be suitable for the client, even if there are superior alternatives that advisers tend to use for new clients, advisers very rarely switch existing investments across platforms.”
Platform experts say this is clearly a confusing picture, but some blame the regulator for not addressing the issue over many years.
CWC managing director Clive Waller says: “The cost of moving a client is between £250 and £1250 with an average of £6-800 – at least when we last looked and the FCA agree. This is totally down to the regulator who has ignored the issue for years.”
Financial advisers’ ongoing charges
Investment Intelligence’s managing director Graham Bentley says: “In my honest opinion, model portfolios are typically run as a means of controlling client capital, justifying ongoing fees with those payments being facilitated by platforms. The client experience is as per pre-RDR.”
Bentley says that it is difficult to justify an ongoing fee for financial planning, since the advice will be essentially a one-off, with perhaps ad hoc adjustments over the years as the client admits to changing personal and family circumstances. It does not demand a retainer i.e. the ongoing fee, whereas portfolio management and monitoring may do.
He adds: “When seen in that light, the efficient reviewing of funds becomes less important to the adviser. Furthermore, it could be argued that a client’s legacy portfolio may still be suitable given the risk profile, so switching to the adviser’s preferred portfolios would need to evidence real additional value versus the cost.”
“Similarly the retention of a legacy platform versus a switch to the adviser’s preferred platform could be seen as a suitability issue, notwithstanding the fact that switching platforms is a laborious, painful process. Of course, making changes with only advisory permissions makes the whole process even less attractive, given all the effort and time spent contacting dilatory clients with no justifiable fee involved.”
Different types of investment platforms
Waller says, in his view, there are three kinds of platform in the eyes of the adviser.
- Those used out of choice to support the Centralised Investment Proposition.
- Those not used for new clients, but where the adviser uses them for top ups.
- Those that hold legacy only, where new money is placed on the choice platform.
Waller adds that although they may not shout about it, many advisers just encash clients and move. He says that his own adviser did with his agreement and that it was quicker and easier.
He adds: “Some platforms will not be able to support an advisers’ CIP. I suspect that there is a significant amount of fiddling around. You would struggle to run discretionary MPS across two or more platforms – and advisory MPSs are horrid. In view of the amount of money going into CIPs, I suspect more is encashed and moved than is admitted to.”
Waller also believes that platforms and indeed fund managers could be doing more to facilitate switches. He adds: “It is also platforms and asset managers being childish, but you can sort that by locking them in a room with the lights off until they come up with an answer!”
Centralised investment proposition challenges
Advisers are clearly cognizant of the issues.
Nexus IFA managing director Kerry Nelson adds: “We evaluate on the basis of individual circumstances. Are clients best staying put or is there value to consider moving to a different platform?
“It is down to charges, and the flexibility of the platform and functionality. Yet if at the end of the day you can shave 0.2% off on an annual basis, and that client is going to be there 10 or 20 years that is a good reason why you might move.
“But there is a flashing red light warning especially if it adds upfront costs. You may want to compromise on the way you charge. You are retaining that client. It needs to be client relationship driven. You wouldn’t therefore want to charge them a meaty fee.”
She says it does then carry challenges in terms of the CIP.
“There are platforms that won’t support a centralised investment proposition. There are legacy holdings in bonds that we can’t move. The choice of funds can be limited. We adapt our portfolios to this. At the end of the day, you still need to see that it makes sense on an individual basis.”
