Michelle Cracknell, Director at Bluerock Consulting said:
“The purpose of a platform must be to make costs lower or service better for the customer or preferably both. If the platform cannot deliver these benefits, it has no purpose.”
In order to lower the costs for the customer, a platform automates the processes that previously were carried out by the customer and/or the intermediary, and/or the fund manager. Through the automation, it should remove a cost thereby delivering value to the customer.
Another reason for the cost reduction that is often cited is the bulk terms on which the platform deals. The size of the investment is not the driver of costs as much as the process around the investment i.e. it is cheaper to service one investor with £1bn than 100,000 investors with £10,000 each.
The service advantages of platforms include the ‘one view’, ease of dealing and managing investments and access to information.
In these days of technology, most customers would expect these to be hygiene factors and hence the customers’ reasonable expectation is that investing through platforms should be cost neutral. On the surface, platforms appear to have delivered these requirements.
But the shape of the costs is not really aligned to good customer outcomes. Of the typical 150bps charge on the fund, instead of 100bps going to the fund manager and 50bps going to the adviser, it is split 75bps to the fund manager, 25bps to the platform and 50bps to the adviser.
Of course, the platforms will then negotiate further with the fund managers demanding more than the 25bps share and then the platform does extra promotion of the fund to generate more inflows and therefore demands an even higher rebate from the fund manager etc. etc.
It is exactly this negotiation that has got the FSA hot under the collar because it has rightly identified the potential conflicts of interest this could create.
The problem that the FSA has is that it is trying to create a set of rules for the imperfect and illogical market structure that has evolved. The delay in coming out with a set of rules will result in customer confusion through a customer holding a myriad of share classes in the same fund.
Michelle Cracknell added:
“One cannot help but think that working within the current framework and changing the share class to remove the fund based renewal commission will be a temporary solution that will need to be changed in a few years time.”
So what should be the blueprint of the charging structure of the platform?
The relationship between platforms and fund management groups is increasingly becoming an institutional one so the funds should be priced accordingly.
It is then for the platform to package up the fund in an appropriate way for its customer, be it an adviser or the end investor, with complete disclosure on the overall cost of investing.
