The illusion of premium

So if you know me you’ll know I bang on about pricing a lot in platforms and pensions. I pick up a bit of ‘price of everything/value of nothing’ flak for this, but you can’t be friends with everyone, right?

However, as we plunge wild-eyed, full of fear, loathing and cheap sparkling wine into 2013 (that’s maybe just me) it might be worth touching on why I’m so obsessed and why I think you should be too.

Let’s take an example. Your client has a £500k SIPP, all invested in a nicely modelled set of 10 passive funds. These are rebalanced annually, leading to, say, an average of 8 trades each time (4 underweight, 4 overweight, 2 about right).

The cheapest deal on the open market just now is an all-in price of 5bps. The most expensive is 55bps. We’ll rule out that outlier and go to the next most expensive cluster, which is at 45bps.

The client pays £250pa to be on the cheapest option. She pays £2,250 to be on the others.

Advisers often prefer a platform because of additional functionality or better service. This leads providers to start thinking about pricing ‘on’ the market or ‘just off’ the market and leaving it to the sales team to demonstrate the additional value their platform delivers. This keeps prices artificially high and increases herding, as we’ve seen with some announcements recently. Exactly the same is happening with the new breed of ‘clean’ share classes.

My question is, for our classic post-RDR target client in this case, how much is better service and more functionality worth? How much does an administrator get? £2k per year is a big difference. It buys a lot of administration.

This year, I want anyone trying to take a ‘premium’ pricing position to have to demonstrate exactly what value they deliver to the client for that premium. Most platforms / pensions do most things now. If platforms or wrappers are to be more than a commodity that’s cool, but it’s time to start ponying up some value.

Maybe advisers will start to charge differentially depending on the solution the client decides to go with – ‘you can save £2k a year but you’ll be on the clock when we have to spend more time on admin’. Whatever happens, let’s keep the pressure on to move past accepting what ‘the market’ says is the anchor price and forcing value out front. I’m going to have some fun trying to do that, it’ll be even more fun if some of you join in too.