The FCA announced this week that it will conduct an Investment Platform Market study to look at “how D2C and intermediated investment platforms compete to win new and retain existing customers.”
Importantly, the FCA has the authority to look at competition, which is a power that its predecessor lacked. Although platforms could have done more to bring down the cost of investing, the review is a case of “it’s not your fault: it’s your turn”.
When it comes to pricing, the biggest criticism that can be levied against platforms is that they haven’t used their buying power to reduce the cost of funds for the end investor. Platforms claim they are agnostic order takers. Shouldn’t they do more?
Let’s look at an example outside of our industry. Supermarkets have pushed manufacturers hard on price on behalf of customers. Tesco might have gone too far on prices paid to farmers, but couldn’t platforms push asset managers a bit harder?
Cynics claim that manufacturers and distributors are too close for comfort in the retail investing industry.
“How are we to push manufacturers to lower costs when even the FCA have suggested they behave like a cartel?” cry the poor platforms. One platform boss I spoke to this week, described the balancing act of pushing for lower prices this way: ”If you squeeze one end of the balloon too hard…”
One argument is that platforms have been spending their skim of basis points building ‘whizzy tools’. We don’t think so. The tools they have developed are mostly meant to help advisers manage portfolios and client reporting more efficiently, think IHT and CGT calculators.
And the platforms have borne much of the brunt of regulatory change in the past few years. They have had to comply with the RDR and pension freedoms in short timescales. They are now being expected to do all sorts of client reporting on behalf of fund groups and DFMs as part of MiFID II.
Many platforms have taken a decision to outsource the underlying technology. This should help to share costs (and expertise) to comply with further regulatory changes. However, while there is much talk about consolidation of the technology, most of these platforms are operating on different software versions. The tech behind Elevate and Standard Life’s wrap platform has the same name on the label, but the contents of the tin are so radically different that there are very few technology synergies.
Our view is that platforms are preparing to introduce price competition in asset management. And we encourage the regulator to consider the total cost of investing in their review. The review is due out next year, by which time we expect to see more of these products from platforms in the market.
Platforms are interested in becoming guiders steering investors and advisers to a smaller number of funds. Platforms can’t guarantee flows but select lists have been an important source of flows from direct platforms, where select lists are more common. We estimate select lists account for 38% of gross sales of funds across direct platforms (Source: D2C Market Size and Structure, February 2017).
Adviser platforms increasingly want to take on the role of guiding advisers toward a smaller number of funds and hope to secure institutional-like pricing for those funds.
After the RDR, Hargreaves Lansdown famously negotiated hard with fund groups to get better prices for funds listed on the firm’s Wealth 150+ select list. Some expected the regulator to give Hargreaves Lansdown a slap on the wrist, but the Asset Management Market Study (AMMS) seemed to endorse the approach as an example of positive price competition linked to distribution power. The caveat is that platforms giving preference to certain fund managers in their select lists could create barriers to asset manager competition.
Advisers that use FundsNetwork often cite deals on funds as an important driver of using the platform.
Platforms are also looking to launch their own range of risk-rated funds. Some will take the form of an OEIC to allow for more efficient management of capital gains. They will all look and feel like discretionary managed portfolios. We expect most will use active asset allocation of passive funds but there is demand for actively managed funds too.
Some platforms will also introduce pools of direct investments – cutting out the fund manager all together. In fact, we understand that one platform is already experimenting with this approach.
In summary, platforms will respond to the FCA: “We’ve been so busy doing this other stuff — but watch this space.”
Yet at the same time, history suggests that the investment industry doesn’t reduce cost without regulatory intervention. UK investors just don’t care enough to push for change.
Britain isn’t called Treasure Island for nothing!