Platform Market Study: Competition, value and outcomes
For adviser use only
In April, the Financial Conduct Authority (FCA) announced plans to launch a study into the investment platform market to assess whether platforms enable retail investors to access investment products that offer value for money.
The initiative has arisen out of initial findings from the Asset Management Market Study which, the FCA says, identified a number of potential competition issues in the platforms market. It will consider if platforms’ investment tools enable effective choice; whether platforms have the incentives and ability to put competitive pressure on asset management charges and, thirdly, whether platforms have complex charging structures.
Any initiative to improve competition and consumer outcomes should be welcomed. But in seeking to address the three issues above, care needs to be taken to have a real understanding of the different models within the platform market and how it interacts with other stakeholders. Here are our thoughts.
1. Using investment tools to enable effective choice
One of the revolutionary benefits of platforms is the range of functionality they can provide to help both advisers and consumers navigate their way through an ever-growing investment universe. But in asking the question about tools and effectiveness, a distinction needs to be made between tools that help educate consumers to make investment decisions and tools that will do the deciding for them.
It will be interesting to see how the FCA refines this question in its consultation paper. As an intermediated platform provider, we’re firmly of the view that expert human advice is what’s really needed to help consumers make an effective choice. Rather than trying to build tools to replace that advice, the issue for us is how platform-based tools can support it.
2. Putting competitive pressure on asset managers
Compared to individual retail investors, platforms with their scale are very well positioned to put pressure on asset management costs. By trading on behalf of thousands, if not hundreds of thousands, of investors, a platform is able to secure a more competitive price.
But pricing influence, where it lies and how far it goes also depends on which kind of model a platform operates. Some platforms simply look to be whole-of-market distributors, offering the widest possible range of funds with no attempt to channel investors into any particular one. Others see themselves as curators – narrowing the investment universe and using fund selection lists and model portfolios to influence where investors place money.
The FCA will need to assess the pros and cons of each. The latter model is more likely to be able to put pressure on asset managers to offer lower charges in return for greater flows to their selected funds. Under the former model, there’s no question of platforms introducing bias and it is more likely to be intermediaries who can negotiate with fund managers, albeit mostly those at the larger end of the scale.
Post-RDR, many platforms have negotiated bespoke ‘super-clean’ share classes with individual fund managers, and discounts will probably continue to be managed on a case-by-case basis.
3. Complex charging
At first glance, platform charging can seem complex. But this is largely because platforms separate charges into constituent parts: the platform administration charge, the fund management charge, the charge for the ISA or pension wrapper – if there is one, something you won’t find when using Aegon.
Since the FCA’s Retail Distribution Review, the cost of advice is also separated out rather than being buried in in-built commission. A single ‘bundled’ charge may look simpler, but platform charging is much more transparent. This, in our view, is better than a simple all-in-one bundled charge where the consumer doesn’t know how much they are paying for what.
Intermediaries are well placed to be able to assess the constituent elements of platform charging to make sure they are offering value to their clients, who of course have different needs.
Pricing and the role of platforms
Intermediated and D2C platforms are estimated to hold more than half of retail fund assets under management in the UK, so it’s natural that their role in determining and influencing investment costs should be scrutinised.
But ultimately, it will be competition in the asset management market itself that will bring down fund costs. The role of platforms is to help facilitate that competition, by making fund costs clear, enabling advisers and investors to compare and shop around and switch easily between investments if a ‘better value’ fund is found.
Of course, value isn’t just about charges. Within funds, performance after charges is key. And for platforms, ease of use, helpful tools, clear reporting and a trusted brand are all factors too – and ones which consumers are willing to pay to secure. Whether it’s platforms or fund management, the big question is still how value for money is defined.