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Topics: FSA| Capita| Synaptic Systems
The extent to which advisers will have to assess individual client suitability for platforms – and whether an off-platform solution may be preferable – has been underlined by the shock findings of a new study.
Its surprising results suggest it will not be enough for firms to segment their client base and assign a single platform to each group; a practice which the FSA has already hinted will likely breach its suitability rules.
The results are based on simple analysis of the long-term cost to clients of both on and off platform solutions using the Capita Synaptic Comparator tool.
This showed big differences in terms of both platform and wrapper charges when even the most basic customer details are changed or updated.
While one platform may be ranked as the most cost-effective for clients in one scenario, it becomes significantly less competitive when a straightforward change – such as for a portfolio to be rebalanced monthly – is requested.
The analysis also suggests that, in many cases, off-platform solutions are often cheaper for customers.
It is understood the FSA is aware of the differences flagged by the analysis and is “very surprised” by the results.
In a Policy Statement on platforms, published in August, the FSA said advisers must be able to “demonstrate why using a particular platform is suitable for an individual client”.
But some are concerned advisers will have differing interpretations of the rules.
The platform comparison tool considered a hypothetical client with a general investment account of £50,000 invested in a balanced portfolio of eight funds for 25 years.
In this scenario, the best platform, of the 16 available, had a single solution cost equivalent to £68,000 over the period. The ‘worst’ platform had effective charges of £83,000.
But when the portfolio was rebalanced monthly, the platform which had previously been top fell to 15th place, with some £69,500 worth of charges.
The tool also identified a number of scenarios when off-platform solutions appeared more suitable for clients.
In an example where £50,000 was transferred into a SIPP, a few platforms gave better value for money than the best combination of off-platform products.
But when an offshore bond was introduced to the portfolio, a combination of off-platform products appeared to give better value than any combination of on platform products.
“It is now absolutely clear there is such a demonstrable difference between platforms – let alone on and off platform – that we cannot see how an adviser can’t even spend five minutes checking the client will not be materially worse off,” said William Watling, product director of Capita Financial Software.
Some of the above research was carried out using the new version of Synaptic Comparator, which compares on- and off-platform investments.
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Monthly rebalancing madness
Monthly rebalancing provides little benefit compared with six monthly or even annual rebalancing, as several academic studies have shown. It does greatly add to costs as your report demonstrates clearly. No doubt a platform that makes little or no charge for rebalancing will score highly, but the monthly criterion is not appropriate. Advisers should be strongly discouraged from the idea that monthly rebalancing makes any sense for virtually any client.
Posted by: Danby Bloch
Flawed report
Unfortunately, this report appears to have a few flaws in it, but then don't they all! Firstly - a portfolio of 8 funds, held for 25 years? OK, so no changes to funds, asset allocations, fund managers will occur for a 25 year period? I doubt it! Secondly - the calculation is, of course, based on the assumption that the value will always rise - which makes it as misleading (and hopeless) as the illustrations we are forced to provide. Thirdly - the calculations are based on adviser charging being the same for each platform. Now, if I like platform A's functionality and it enables me to provide my agreed service to my clients efficiently, I can pass on the cost saving to my clients. Thus platform A, will have a lower OVERALL charge. Capita are, of course, just trying to justify the need for the comparison tool...
Posted by: You must be joking
Re-balancing
Monthly re-balancing does seem a little excessive. Re-balancing should be done when it is needed, and annually should suffice. But what this report tells you is that yet again whatever you do is not good enough for the FSA! Surely what matters most is ensuring advisers are looking after clients and the reality is that Fund Platforms make looking after clients efficiently much easier.
Posted by: Jeremy Newbegin
Hypothetical is just that!
So, will we from now on assess suitability by measuring against irrelevent or inappropriate hypothetical scenarios? How contrived was this example? Hypothetically there is no reason why I can't run a four minute mile - with arthritic knees and a body that simply won't do it however the reality is that I can't - doh!
Posted by: Duncan Carter
Just a thought - what a shock
Presumably Capita will also have a survey that the FSA is aware of, showing how some clients will be disadvantaged by not having a platform solution. Where will at all end?
Posted by: Duncan Carter
The figures?
I'll quot ethe article: "In this scenario, the best platform, of the 16 available, had a single solution cost equivalent to £68,000 over the period. The ‘worst’ platform had effective charges of £83,000.But when the portfolio was rebalanced monthly, the platform which had previously been top fell to 15th place, with some £69,500 worth of charges." On the basis of these figures monthly rebalancing OVER 25 years - so effectively 2400 transactions (12 months x 25 years x 8 funds) cost just £1,950 a WHOPPING 81p each!!! YAWN YAWN YAWN YAWN
Posted by: You must be joking
Dubious
I would be less sceptical about this report had it not been done using a piece of software that is designed and marketed to be used for every single client you have. In the real world this level of analysis is just not feasible for every single client. I fully accept that one size doesn't fit all and you will need two or possibly three solutions. Yet again its all being dragged down to just cost which is a 10th of the full picture, service, sustainability, range of wrappers etc etc are all equally important.
Posted by: Kev S
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Suitability
This is an interesting report but reports that purely look at costs never seem to take in to account service, convenience and practicality of one platform or another. My clients often prefer to pay a little more for the benefits of those three qualities. "Never mind the quality....." comes to mind
Posted by: Geoff Pollock