Guided architecture under fire

David Ferguson, CEO of Nucleus, looks at the implications of the FSA’s latest platform discussion paper.

Here we are again. The big difference this time is that the FSA has now published DP10/2, a discussion paper that may have done for the platform sector what CP121 did for financial advice, namely focus a harsher light on who is doing what, and for how much.

While there seems to be a widely held belief that the platform market is here to stay (and indeed that it may grow up to five-fold in scale over the next three to five years) there remains less consensus over where that growth will arise. Or at least there was before 26 March when the FSA set out its thoughts in a clear and determined fashion.

The freedom the platform space has enjoyed since the early 1980s is becoming exposed to a lot more scrutiny. The open-architecture label that endeared fund supermarkets to armies of IFAs seeking something more than with-profits or balanced managed funds is about to be carved open and inspected to within an inch of its life. You will be familiar with what seems to be known as the bundled/unbundled debate and, while a huge issue, a further and perhaps less widely discussed element is open architecture. Or to be more accurate, the difference between constrained architecture and open architecture.

Given that we appear to be moving more towards a world in which the IFA is directly remunerated by the client for the financial advice or intermediation services provided, the FSA has realised that it is inappropriate for the platform on which any business might be executed to be remunerated according to those assets it makes available for investment.

To put it another way, an IFA seeking to act as broadly as possible on behalf of his or her client simply cannot run the risk of powering his or her business on a fund supermarket as the risk of non-alignment between the interests of the client and the executing platform is too great.

Or looking at it yet another way, how can an IFA demonstrate that he or she has acted in the best interests of the client if the platform being used limits the client’s investment choice to those asset managers who are willing to pay a distribution allowance to the platform?

I’m sure there will be occasions when a fund supermarket is the best solution for clients. But when that is true, it will be a coincidence that it is so, and it may be a coincidence that only lasts so long. What happens when the advice changes and the new proposal cannot be executed on that platform or when a large asset manager and a fund supermarket fall out over the commercials between them?

We hear from some of the older platforms that IFAs and clients are confused by the unbundling of charges. And how the introduction of greater transparency and wider consumer choice will only lead to higher prices and consumer detriment. While they may be older, it seems to be they are no wiser, as I cannot recall a market in history in which consumers suffered where there was greater emphasis on transparency and choice.

What the FSA has done in expressing such a strong opinion in favour of unbundled pricing is to promote the only pricing model that can deliver consumer-agreed remuneration without introducing platform-induced bias into the advice given and for that I truly applaud our much maligned regulator. The FSA has highlighted that propositions where platforms charge for shelf-space (or even worse guided architecture where the platform might gain further through filtering the market and introducing concentration risk) can no longer be considered open.

It might have been OK in 1982, 1992 or even 2002, but it isn’t any more, and it won’t be beyond 2012. The future is about platforms that can demonstrate they are charging a fair price for administration services on a basis that is entirely clear who is doing what and for how much.