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Waller: Why paying for platforms must change

Waller: Why paying for platforms must change

This month Citywire submitted a response to the Financial Conduct Authority's platform review. Our headline recommendation was to suggest advisers pay platform costs rather than the clients. The full response can be read here. It has prompted a lot of discussion on the website and here Clive Waller, managing director at CWC Research, explains why he thinks it makes no sense for clients to pay modern platform costs. 

The disagreement over who should pay for the platform, adviser or client, is such an interesting one. There are compelling arguments for and against. While vital to look at where platforms are going, because the world of technology is not at a standstill, we also need to look at where they came from.

I was turned on to platforms by the ultimate guru, Ian Taylor, chief executive of Transact, then in very unpretentious offices in London’s Hackney. Transact’s proposition removed the need for product providers, then largely life companies, selling enormously expensive bonds and paying advisers huge commissions.

The products were life bonds, but in this case, a portfolio of funds of the IFA’s choice; a pension – the same but with a Sipp or personal pension wrapper; ISA – the same but with an ISA wrapper. The platform might provide the wrapper such as Transact’s Integra Life for bonds or the wrapper could be outsourced. Either way, the cost was trivial compared to ‘old world'.

It is interesting to note that this was an early example of vertical integration (the model used by St James’s Place, Quilter Private Client Advisers and others) The product provider being the platform in partnership with the adviser. The funds are just filling.

At the same time as Transact was launched, a group of fund managers launched Cofunds, to outsource admin (from their viewpoint) and to provider advisers with a trading platform. FundsNetwork and Skandia followed similar models. For some years, these were limited in that they did not offer a pensions wrapper, a cash fund or the ability to trade in securities - stocks and bonds, exchanged traded funds or investment trusts. Functionality has improved over time, and in the not too distant future, the old supermarkets will have the same functionality as the wrap platforms.

In the early 2000s, both Pershing and SEI joined the party, providing platform resource to a few large intermediaries. One of the big names was Towry Law, which partnered with SEI. When asked at a conference how Towry would remain independent with a single platform proposition, then chief executive Andrew Fisher famously responded that SEI powered an admin hub, not a platform, and it was no business of the regulator who handled their admin. For me, he was right.

Why so? Importantly:

Towry paid SEI’s charges – not the client’;
the functionality was built for Towry – not to do anything an IFA might want;
the client charge reflected client use (via fees) as opposed to assets under management.
Towry still went restricted, probably due to their centralized investment proposition being a Dublin based range of portfolios that might not be the cheapest. But that is not the point, so let us roll forward a few years.

Look at the Fusion Wealth proposition, an award winning ‘platform’. SEI providew the heavy lifting in the back office, Creative Technology does most of the middle office platform stuff and integrate (unsurprisingly) with Enable, a superb practice management system (PMS) – also built by Creative Technology. Now please tell me, which bit is the platform?

If you and I and a couple of mates decided to build a large adviser business we would consider building our own platform too.

We might look at SEI or Pershing for custody; we might approach Allfunds or Aegon (the old institutional Cofunds) for fund trading; we might ask Winterflood to provide Securities trading and Dunstan Thomas to help on the pension side. We could have a word with Intelliflo about linking into it all with its practice management system (PMS) via an application programming interface, for example. I ask again, which bit it is the platform? The PMS is an interesting piece of the discussion, as advisers have often asked why they have not become platforms. Commonly, today, advisers use the PMS for aggregation of client assets across platforms, as it is too expensive to re-register onto a single platform.

In short, the IT that supports an adviser business is becoming modular. Advisers will look for best of breed and expect, indeed demand, they all interact perfectly. Many firms will offer digital propositions alongside their fully advised model.

The idea of a one-size-fits-all platform that does everything any adviser in any firm might wish for, with all the cost that comes with that, stretches my imagination a little.

Finally, the PMS will calculate the true time cost, which will be the basis of the fee or an ongoing guide to the effectiveness of the current fee model.

So when it comes to the question whether the client or adviser should pay for the platform I just cannot work out how you could pull out a bit of the overall IT package and ask the client to pay separately.

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