Better Business: When the price is not right

David Ferguson, CEO of Nucleus, assesses recent moves by wraps and platforms to clarify their pricing structures.

There has been much in the news recently regarding platform pricing, with various views offered on where sustainable platforms will need to price themselves over the medium/long term. Whether this is simply posturing or more genuine attempts to reposition, greater awareness of pricing models can only be good news for IFAs wishing to make informed choices on which platform is best for them in the run up to 2012.

Suicidal pricing models

If I recall correctly, Transact was first up with an assertion that while the firm charges an average of about 60bp across its entire book of business, it is able to manufacture and distribute the proposition for 40bp, thus deriving a gross profit of about 20bp. Although there was apparently a suggestion in the firm’s letter to investors that some other providers were operating suicidal pricing models, I do not believe the remarks were aimed at us. I’m happy to confirm that Nucleus is now just weeks from being cash positive, so we remain content with our pricing.

Second up was Axa, which announced it was removing the initial charges on the bundled version of its Elevate proposition. Quite how attractive the proposition was before this is rather beyond me, but in any event it is a welcome move. It would be great to have clarity from the other fund supermarket on their initial charges, and in particular how much margin they retain when clients switch between funds.

Next up was another life office wrap provider – Aviva – which announced it was also dropping initial charges, although in this case only until the end of 2010. I think it would be a bit of a surprise to see these charges re-emerge in 2011.

Skandia announced it had woken up to the margin realities of the future and was cutting costs in an attempt to live within the 50bp margin it believes to be sustainable. Given that we don’t really know how much Skandia has been charging – it hinted 75bp in a recent analyst presentation, and I recall lost £9m last year –it is hard to know whether the firm can get there with these cuts. It is harder still to know whether it will really be able to charge 50bp going forward. I guess we’ll need to wait for unbundled pricing.

Alongside this, we have become increasingly aware of some smaller platforms offering cut-throat deals, considerably undercutting their published charges to secure IFA relationships.

While this is an interesting tactic and a function of a healthy market, I would love to know what those firms’ shareholders think and what such moves might be doing for their business model.

To add to the mix, Ascentric has been making noise about (effectively) charging shelf space fees to those fund management groups with modest assets on the platform. Quite how that fits with a fully independent open architecture proposition I’m sure it will explain in due course.
All in all, I guess all of this pricing ‘noise’ is just another sign of the market heading up ahead of the implementation of the RDR at the end of 2012.

Price isn’t everything

Of course, and as with everything in life, price isn’t the be all and end all, and there will always be differentiation around other factors, such as the richness of the service provided, supporting tools (assuming the FSA permits such offerings), or even adviser loyalty to certain platforms.

Ultimately, the decision on which platform offers the most appropriately priced proposition will lie with the adviser and the customer. I just urge the FSA to force absolute transparency so those decisions may be made on a fully informed basis.