Lessons from across the pond and down under

By looking at overseas experiences, we can see what may lie ahead post-RDR, writes Ed Dymott, head of UK fund partners, Fidelity International.

The FSA’s Platform Discussion paper’s proposals focus everyone’s mind on whether the regulator will actually achieve its RDR outcomes and, short of using a crystal ball, the only thing we can rely on to make that judgement is experience. Experience of the UK market is essential. You simply cannot understand how the RDR might impact the UK landscape without a deep understanding of UK consumers, advisers, producers and distributors.  But, while the UK is something of a blueprint for countries across the world when it comes to dealing with many of the issues and conflicts that exist in the distribution of financial services products, when it comes to platforms specifically, it is by looking at experiences from overseas that we have the potential to see what may lie ahead post implementation of the RDR.

If ever there was a platform market that was held in high regard it is Australia. Relatively speaking, the Australian platform market is huge – a AUS$400bn juggernaut. Around 80% of all Australian retail assets are held through platforms, dwarfing their UK cousins, with the first entrants launching before the concept of open architecture even hit these shores. This growth was driven mainly through compulsory superannuation schemes which led to a proliferation of platform propositions. Ultimately, the rate of growth was unsustainable and a degree of consolidation took place, reducing the number of platform operators in the market. Now, the five biggest platforms account for around 70% of the sector and it is familiar retail investment and banking names that top the big-hitters list.

From initially offering huge investment ranges, the market is now increasingly focused around ‘baby’ wraps, which offer access to fewer funds and a smaller core range of multi-manager products usually taking the growing proportion of flows. The value chain has also changed, with platforms now taking a dominate share and asset managers being squeezed down to the tightest of institutional margins. This low margin model has seen more internal funds being sold and explains the reduction in investment choice. Lower margins require higher volumes, which leads to choice being constrained. Perhaps this isn’t the vision we had in our rose-tinted RDR specs?

In the context of the Discussion Paper, it is interesting to note the Australian market uses the now much-coined phrase ‘unbundled pricing’. These models, where the platform explicitly charges, cause concern to us because we feel it is likely to increase the cost of investing. In the UK, our research shows the average unbundled platform costs around 37bps more per annum for an ISA than its bundled equivalent. Platforms in Australia are generally more expensive.

Commissions are also currently still prevalent, many of which are paid through the backdoor to ‘dealer groups’ and networks. This shows that, however developed the ‘wrap’ market may be, with commissions present, the same conflicts exist. As a result, the Australian regulator has recently announced an outright ban on commissions. It is part of a package of measures that come into force just ahead of the RDR in July 2012. Australia is not the only other country hot on the RDR trail. India has recently announced an outright ban on commission payments. Rumour has it the Netherlands is set to follow. We are not alone.

High rate of savings in the US

Next, to the US. Again, this is a very different market, one of mature investors who are switched on to the need to save and invest to protect their own financial future. Savings rates are high, supported by the ubiquitous 401k employer-supported personal pension plans.
Highly professional independent advisers, who enjoy a status on a par with other trained professions such as accountants and solicitors, charge fees rather than receive commissions. Advisers are generally remunerated on a fee basis, which is agreed with the customer up front and covers a wide range of asset classes and financial services needs.

The US platforms are provided by ‘brokerages’ and offer an almost overwhelming array of choice from mutual funds and individual securities to separately managed accounts. The pricing models vary but typically have bundled and unbundled fee structures that often coexist alongside one and other. Some customers are charged directly by their platform provider, others are happy for the fee for administration to be paid to the platform by the product provider in what would be described in this country as a rebate. It is all above board, with no suspicion of the underhand practices that the FSA is rightly keen to eradicate.

The US model shows us how the power of customer demand and the determination of platforms and product providers to work together means that even those fund providers with the thinnest of margins can be found on some of the biggest platforms and that suitable pricing models can be found. Low-cost passive fund managers and ETF providers can find their way on to platforms with bundled pricing structures.

So there are many similar examples to the UK and we should learn from these experiences in terms of both the good and bad. Of the two markets described, I would argue that the US experience would be the most desired outcome for our industry.

Meanwhile, the UK platform industry finds itself in something of a hiatus. Until some clarity emerges from the FSA about what business models will and will not be acceptable, little meaningful development can take place on this subject. And all the time, the clock is ticking to the end of 2012.

Undoubtedly, the industry will play whatever cards it is dealt, but we do hope the FSA has the foresight to look beyond these shores as it considers what the future may hold.