Platforms: Your route of choice

Ian Thomas, head of customer experience and online services at Axa Wealth, looks at how the recent FSA paper will affect advisers currently using platforms.

Now we have had some time to digest the recently published RDR policy and platform discussion papers, what should we make of the implications for advisers using platforms today and in the run-up to 2012? There are some clear issues for the fund supermarkets and their users, given the likely direction of policy on charging transparency, fund rebates and re-registration, but here we focus specifically on the much-debated issue of independence and the use of platforms.

The FSA statement that ‘…a platform is a service, not a product. However, they can display product features…’ (DP10/02, 3.6) does not exactly provide the absolute clarity many were hoping for regarding the use of a single platform as an IFA. Also, the warning that ‘…platforms advice will form a supervisory priority in the future’ (DP10/2, 2.18) will certainly cause many advisers to re-evaluate their current control framework and use of platforms.

Transaction-led or ongoing?

In the platform paper, the FSA makes a clear distinction between what it calls ‘transaction-led’ and ‘ongoing portfolio advice’ services. In the first case, the regulator asserts platforms may be of use as a ‘transaction venue’, but there is unlikely to be a significant advantage in aggregating a customer’s assets onto one single platform. Given the absence of an ongoing service there is likely to be a much higher emphasis placed on price and ‘best execution’.

While I generally agree with this analysis, in practice ‘one-off’ transactions often turn into a series of inter-related investments which, with hindsight, the client may have preferred to be on a single platform. From the client’s perspective, the ease of administration, reduced cost of switching between investments and the improved understanding of overall asset allocation which aggregation brings should not be ignored.

In contrast, for the increasing numbers of advisers offering portfolio advice services, the FSA recognises ‘a customer may benefit from having their assets aggregated on a platform…’ (DP10/02, 3.62). However, ‘a firm with a varied set of customers is unlikely to be able to use a single platform for all their customers’.

Quite rightly, the regulator doesn’t want to see advisers put square pegs in round holes, just to suit their business model. However, I am concerned this statement, if taken out of context, could be misinterpreted to mean that every single transaction for each client must be conducted at the lowest cost (assuming investment range, service, and so on, are equal).

If this really were the case, advisers and clients would quickly build up a plethora of underlying products and platforms: exactly the model that has proved to be in no one’s best interest in the past.

We should welcome the emergence of independent cost-comparison tools such as the ones being developed by Platforum and Capita. But how these tools are used in practice will be the key issue. If all we end up doing is replacing the words ‘life company’ with the word ‘platform’ in a price and feature-led ‘best advice’ system approach, what have we actually achieved as an industry for the benefit of our clients?

Helpfully, in the Platform Project Findings report, the FSA provides some more clarification in this area: ‘This does not mean we expect firms to review the platform market for each client, but we expect firms to consider which platform/s are appropriate for their client bank – or segments of their client bank – in general terms and then ensure the recommendation is suitable for individual clients.’

Inevitably, there will be some kind of trade-off between the number of client segments with which a firm deals and the number of platforms needed to support ‘suitable’ advice. This may force advisers to focus on fewer, more defined customer segments in future, because there are clearly negative profitability implications for firms in managing several different back-office processes to deal with the specific requirements of different platforms.

For example, AXA Elevate has already recognised this issue and offers both a supermarket and a wrap-style proposition to meet the widest range of client needs. At least two other platforms have indicated their intention to imitate this model.

Successful integration

Examples of poor practice the FSA identifies are worrying. However,  it is also encouraging to see these shortcomings are not representative and the review also found several firms that had ‘successfully integrated platforms into their businesses, while consistently offering advice that was in their customers’ best interests’. (DP10/2, 2.17)

Where poor practice was identified, the most common reason was ‘inadequate consideration of the overall ‘solution’ – the combined cost of the product/s, the platform and the cost of the advice, including ongoing servicing.’

For advisers offering any form of ongoing advice, I would argue that the ‘onus of proof’ within an advice firm’s control framework should be to demonstrate the added benefit of not using a product available through the platform identified for a particular client segment.

Regular due diligence

This may sound controversial, but assuming that regular due diligence is carried out on the platform supplier/s used by a firm, and that a careful factfind identifies the needs, experience and so on, of the client, this is a solid starting point. Given that most product wrappers offer very similar features and pricing (the latter point will become increasingly apparent post-RDR), the significantly higher ongoing management costs of trying to offer a financial planning service without using a single platform solution per client are likely to have a higher overall negative impact on the consumer outcome than any potential cost saving that may be achieved through individual product selection.

Of course, if there is a genuinely differentiated, niche product that best meets an individual client’s needs, an off-platform recommendation should be made. But I strongly suspect this will be the exception, not the rule.

In this regard, I am somewhat puzzled by the FSA’s assertion ‘there may also be fewer advantages for arranging some investments through a platform, for example, life assurance bonds.’ (DP10/02, 3.63). I struggle to see why this should be the case, particularly if using a true open-architecture bond, which does not re-price the underlying funds. The same advantages of being able to easily manage an investment strategy for a client apply equally here: reporting, portfolio re-balancing and switching assets between different tax structures will all be significantly easier when using a ‘true’ platform bond, which in all likelihood will result in a better quality service to the client, at a lower price.

No doubt, there will be different interpretations in some quarters. However, I do not see anything in the FSA papers that should discourage independent advisers using a single platform solution if their clients’ best interests are being served, and appropriate systems and processes are in place to control and document this.