How to solve a problem like platforms

It may be a while until the Financial Conduct Authority unveils the results of its probe into the UK platform market but the investment world already has its own views on how they can be improved.

A full FCA report will not be published until 2019, but the gaze of the regulator will do nothing to stop the explosive growth of platforms in the meantime, with assets under administration on platforms rising more than 25% in just one year between 2016 and 2017.

The value of platform assets is expected to treble to £1.4trn by 2021 according to Fundscape research, which noted assets were already at £560bn by the end of the third quarter this year.

However, the question as to how much value they provide for clients remains.

Among the problems is the issue of firms listing their own funds on best buy lists, with evidence that vertically integrated fund platforms favoured their own products.

FCA research found these ‘affiliated funds’ were “significantly more likely to be added to the recommendation list than non-affiliated funds” and “less likely to be deleted from these lists than non-affiliated funds,” in a report published earlier this year.

Dreams of discounts dashed

The lang cat has also found platforms are not as effective at securing discounted fund prices for their users, despite often selling themselves on the point.

Using Hargreaves Lansdown’s Wealth 150 list of funds as an example, Mike Barrett, consulting director at lang cat, says the average discount across the products was just 0.13%. “We really don’t think it’s worth it,” he says.

Barrett adds that the complexity involved in creating discounted “superclean” share classes was another issue in securing discounts, as was the resistance from fund groups themselves, especially well-known brands, to agree to lower-fees in the first place.

Discounts only being made available to new clients, and the generally underwhelming level of discount, were also listed as key reasons why platforms had done little to reduce prices according to Barrett.

Dan Brocklebank, head of UK at Orbis Investments, says improving returns for clients was in everyone’s “best interests”.

However, platforms aren’t doing enough to help fund managers improve competition, he said at a Transparency Task Force event on Thursday.

Too much choice

The sheer amount of funds available, with some 70,000 available to global investors by Brocklebank’s estimation, gives people too much choice. It translates into hundreds of funds from the same fund group or manager once every different share class was listed on a UK platform.

Brocklebank’s first suggestion to improve the universe is to reduce complexity by limiting fund managers to listing just five funds to solve this “endemic problem across the industry”.

Fund managers would compete harder and more effectively if the process of listing on a platform was simplified, he adds, suggesting they could pay up front for the onboarding process.

“They’ve got to streamline the process,” he says. “If I was a start-up fund manager there is just no way I could consider going through the process of joining a platform.”

While he admits some of his ideas were slightly left-field, Brocklebank also suggests platforms should calculate a fund’s value for money on behalf of investors to aid decision-making.

Time for revolution?

Combined, this could revolutionise the way the platforms on-boarded funds and presented them to customers.

However, as Barrett notes, overhauling platforms will not solve the problem of securing value for money.

“We’re not really sure what the problem is, but the problem is not just platforms. Other areas of the value chain have a big impact. The difference between a quality financial adviser and a poor one has much more variance on what the customer outcome is,” he says.

Nevertheless, the platform market could be a good place to start as more and more take to them to invest and save.

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