How can you check you have the right platform?

With so many platforms to choose from and new entrants set to join the industry, how can advisers make sure they pick the right proposition for their clients? Maria Merricks investigates.

The number of advisers embracing platforms as part of their business infrastructure is expected to surge thanks to the upcoming RDR requirements which will call for new focus on client service and transparency of charges.

Choosing the wrong platform, however, can be catastrophic for both IFAs and clients, and it is with this in mind the FSA have swooped on due diligence, making it clear advisers must conduct a comprehensive and robust review on platforms.

The regulator says these recommendations must be based on suitable reasons and backed up with evidence, meaning the due diligence process should not be taken lightly.

Despite this, many advisers are struggling when it comes to platform due diligence and are unsure about what is an adequate and appropriate process.

Confusion

Earlier this year, Skandia surveyed 1,400 advisers and found that less than half had carried out formal due diligence when selecting a platform.

Of those that investigated the market, glaring variations were apparent in the number of platforms examined: 55% researched four or more, while 45% had researched three or less.

The study also showed disparity between the time devoted to research: 29% of advisers spent a day or less on the process, 43% spent between three days to two weeks and 28% between one to three months.

From these findings, it is safe to say there is no general consensus as to what constitutes sufficient due diligence. So, is there a right answer?

Jeremy Mugridge, platform marketing manager at Skandia, warns adequate due diligence should cover all platforms, although he adds it is likely some can be ruled out based on a few basic elements.

He does, however, warn there are no set guidelines on a sufficient period of research:
“There is no right or wrong answer but given the emphasis on this area from the FSA it is not something to take lightly. Any adviser whose due diligence process takes less than two weeks should make sure it is comprehensive enough.”

Key considerations

The FSA has emphasised the client’s needs come before the adviser’s, Mugridge says. Irrespective of any strategic firm decisions to use a platform, they must still consider whether it is suitable and meets each client’s needs before recommending it.

An essential reference point is the FSA factsheet, Platforms: using fund supermarkets and wraps, in which the regulator outlines the nine key elements to consider:

1. Reputation of the platform provider
   
2. Terms and conditions
   
3. Charges
   
4. Range of funds, tax wrappers and other products available
   
5. Range of asset classes
   
6. Functionality (the ability to switch or re-register)
   
7. Accessibility
   
8. Additional tools
   
9. Support services
   

Within each of these areas there are a number of questions that must be asked and a platform’s financial standing should certainly be one.

Mark Waters, investment manager at Skerritt Consultants, learned this lesson the hard way when the firm encountered problems  with UBS’s platform in 2008.

He warns it is essential the adviser is absolutely sure the platform is going to be around for a long time to come.

“UBS put forward a good proposition but pulled the rug from the platform during the banking crisis,” he says. “If a platform goes under, the adviser is put in a horrible position having to explain to the customer: you chose it so why has it gone wrong? Thankfully, we didn’t have too many clients on the platform at the time, but it flagged up the importance of having an escape route.”

Certainty was Skerritt’s main consideration when choosing its subsequent platform.

It chose Ascentric because the wrap had a strong parent behind it in policy-holder owned Royal London.

“The idea of a strong parent brings into question some of the smaller platforms,” Waters says.

“You could say the rush from providers (especially some of the smaller ones) to get into the platform sector has meant that some of the platforms do not actually work properly and this is worrying. Advisers are completely stuck if the platform doesn’t work, so they must be tested sufficiently.”

Questions

Having a defined due diligence process that is consistent across an adviser’s whole client bank will ensure compliance, efficiency and cost effectiveness.

However, with an ever increasing number of platforms entering the industry, this is easier said than done.

In order to help streamline the process, a number of companies have developed due diligence tools.

Skandia has introduced the Platform Watch tool (www.skandiaplatformwatch.com) which has been developed to address the three key challenges they have found advisers face.

Mugridge says: “Research we have done with financial advisers shows that just over half of them find analysing information and making a selection is the most challenging aspect of platform due diligence. A quarter felt that it was sourcing information from the platform providers and 18% said knowing which questions to ask was the most difficult part.

“If an adviser can find a process which uses a common set of questions, a consistent method of contacting the key platform operators and a structured way of evaluating each response, they are well on the way to a workable and efficient due diligence process.”

Platform Watch is a free-to-use tool which includes a bank of 120 questions organised into the nine key areas set out in the FSA’s Platform Factsheet. Advisers can choose the questions they need answered and can even add their own to ensure the analysis is tailored to their requirements.

The ‘collect responses’ feature enables due diligence questionnaires to be emailed or posted directly to each chosen platform provider and then, once responses are received, advisers can rate each response against each question. A bespoke adviser branded report outlining the basis of the decision can then be presented to the client and kept as part of the adviser’s compliance records.

In addition to Skandia, up to three platforms can be rated alongside each other. Mugridge assures, however, there is no bias towards the provider’s own:

“The tool produces a suitability score based on the priority of each question and the rating advisers give each platform,” he explains. “The methodology is completely impartial and produces an unbiased suitability score that determines which platform best suits the adviser’s criteria.”

In its thematic review of platforms, the FSA outlines how important it is for advisers to take more care when considering the cost to clients, stating:

“Where a platform is used and the adviser provides a portfolio advice service, there needs to be a good reason for the additional costs. These costs can arise not only from platform charges but also from adviser charges and, potentially, more expensive products. Similarly, where the firm’s investment service can be offered more cost-effectively by a different platform (for example one without additional costs) we would expect the firm to use the more cost-effective platform unless there is good reason to use the more expensive one.”

All very well, but industry commentators say charge interpretation is no easy task. As Waters says: “With all the different strands of charges, it is virtually impossible to find out who charges what. Some transparency would be nice.”

Holly Mackay, director of The Platforum, agrees:

“Platform pricing has been nearly impossible to calculate before – initial fees, rebates, transaction fees, varying interest rates on cash, the list goes on. As with any developing market, there has been a time lag between the development of platforms and the necessary tools to evaluate them,” she says.

With this in mind, The Platforum has worked alongside Capita Financial Software to develop their own online platform comparison service, ‘Synaptic Comparator’.

“It is basically a super-detailed calculations engine which looks at all the different permutations of a client’s portfolio and helps to work out what it actually costs,” Mackay says.

The tool saves time and effort for advisers as it can complete regular due diligence of the market. It maps the adviser’s requirements including features, tools, independent service ratings from The Platforum, funds and charge projections validated by Capita actuaries and the platforms themselves.

Addressing the criticisms of platform charging transparency, the product’s significant feature is how it combines all charges associated with each component of every platform to provide a true comparison across the market place.