Platforms: Time for the ‘old school bundlers’ to show their hand

Chris Smeaton, head of product development at James Hay Partnership, considers the platform landscape in 2012 and reveals why he thinks the FSA will remove its expected cash rebate ban…

The fund platform and wrap market has been a busy place since the publication of the FSA’s latest RDR instalment, which will see the financial services industry move towards a cleaner and more transparent future.

One key element introduced by RDR, above all others, will be the removal of embedded commissions from fund charges.

This looks set to drive forward greater independence and transparency in the market and shift the balance of power between fund managers, platforms and advisers.

Such changes will be great news for the platforms who already offer clean or ‘unbundled pricing’ but represents a major headache for the many platforms, providers and life offices that do not.

This group, the “old school bundlers”, has been offering smoke and mirror discounts, enhanced allocations and commission indemnities for years in order to sell their propositions, at the expense of client value for money.

They have had many opportunities over the years to wean themselves off their over reliance of these, behind-the-scenes margins, but have failed. We have known about these changes for almost three years but, even now, less than 12 months before the implementation of the first phase of RDR, several big players have yet to confirm their new 
pricing structures.

Why is it taking so long?

The fluctuating nature of regulatory change is an excuse for some providers, waiting and hoping the FSA will back down.

No doubt some are working behind the scenes, not yet ready to ‘show their hand’, but planning new propositions, which will be ready just in time for the end of the year. Perhaps some simply do not know what they are going to do in 2012.

I hope they are not working on more convoluted, new methods to further confuse and obscure the reality of the costs. This would be a great shame and undermine many of the drivers of RDR.

Hats off to the FSA for having the strength and determination to see this through. It is not perfect and will result in much upheaval, especially for advisers, but it is a big step towards a better financial services system for 
everyone involved.

What will the 
future look like?

The transparent, unbundled platform model is likely to win through and will become the new accepted way in which investment platforms operate, to the benefit of financial advisers and direct clients.

On the surface, the less transparent offerings are impacted by the ongoing matter of poor value fund charges that will eat into the value of the portfolio, and the restricted range of investments which will result in overdependence of rebate income. I expect once the FSA has spoken to more forward-thinking providers, it will remove the ban on cash rebates and see this as necessary to bolster transparent models that bring so many benefits.

In terms of the market landscape, the focus can now move from “how much commission will you pay” into a far more positive conversation about service quality, investment flexibility and online portfolio management features – in short matching the product to the needs of the clients.

As with car and home insurance, product pricing will rise to the top and we are likely to see several major players offer low cost products, which will prove popular with many mainstream IFAs.

In time, I suspect service quality and overall value will become key criteria for those IFAs who do not want to deal with call centres or a one size fits all solution. With capital adequacy requirements increasing and the need for IFAs to perform wide reaching due diligence, smaller operations will struggle.

These smaller platforms and SIPP providers may provide a valuable specialist service but they are at risk of being swept up by the RDR and platform reforms and will struggle to reach the critical mass to enable them to be profitable and make the required investment into systems, controls and compliance. For these reasons we are likely to see them increase fees in the short term but long term they will be consumed by larger companies and networks.

The future is bright!

We still have some way to go to see the final benefits of the FSA’s RDR crusade but the main benefit is one of a client proposition being clear, fair and simple.

We need to know the cost of fund management from the fund manager, the cost of administration from the platform and the cost of advice from the IFA – sounds simple enough but getting to this point is likely to be harder than we think and if history is anything to go by, it could be some time before the entire wrap and platform industry achieves this goal.