Whose sunset is it anyway?

A really interesting piece was posted on here yesterday from Iain Wishart and it struck me that this will likely be an increasing dilemma for a lot of firms over the next 12 months. That could be caused by the complexity of the current transversion (a word that I’m fairly sure doesn’t actually exist outside of FS) process, as he described, or the reality that a large number of these clients are simply no longer engaged with their advisors and have little incentive to act. I’ll let others debate the rights and wrongs from a client servicing perspective (and that does need debate) but I think it’s worth looking at this from another, less mentioned angle…

On the point re how hard it is to actually move the clients, in my opinion (and this is all just my opinion) developments here will be more than interesting. The £23,000 mentioned in the original article is no small sum but clearly Iain’s business has made a calculated decision with regards to that. However, multiply that by every firm with anything on a legacy platform and you quite quickly get to an eye watering figure. And therein lies the nub of a bigger issue – from the platform provider side of the fence. Remember it is actually the platform rebate itself that is being removed as a result of the sunset clause. It’s from this that trail commission gets paid hence the common misconception that it’s the latter being ‘banned’ outright. This soon to removed rebate serves two purposes, it’s the vehicle to deliver trail commission but it also delivers the platform charge, the traditional revenue on which all platforms, and some wraps, are built. That is now being replaced by an outright fee post RDR obviously, but, the ‘orphan books’ on the bigger players (which the platforms have to measure by whether the assets are in clean/dirty units, not whether they are on an advisor fee) remain substantial, both in terms of AUA and contribution to total platform revenue. I’ve seen guesstimates as high as 30% of AUA with regards to some providers, which naturally reflects directly into revenue.

I don’t think anyone would expect a platform to work for free (or be default magnify the cross subsidies already inherent in the model, well the non flat-fee model if you’d pardon the pitch) and yet that is the challenge some providers are facing. How do they overcome the issue Iain faces when his conclusion (to walk away) isn’t feasible to them considering the sums of revenue involved?

On top of that the bulk of these clients are often, crudely, the least economically viable from an administrator’s perspective. Sub £25k portfolios with lots of direct debits knocking around adding to the underlying costs to the platform yet offer little chance of covering those costs via their rebates. I’ve seen comments this week that some platforms will encash holdings and send cheques back to the clients on the eve of sunset. To do that would hit the AUA hard and providers rarely like that outcome. They would also, perversely, see a positive impact on their profitability as these loss making clients are removed from the equation. However it’s hard to envisage that occurring even as a measure of last resort, and I don’t think anyone would desire it. The implications and moral maze that opens are significant and even ignoring TCF, CGT and loss of ISA wrappers it’s just not the way large platforms think, in my experience. Despite the ease of which we can all find historical reasons to distrust the big platform providers/life companies I don’t think in 2014 they are as short sighted or reckless with regards to client outcomes as they are often accused.

Many of the legacy platforms are currently going through a process of mutual benefit that attempts to move these clients into IFA led execution only models where the service, support and marketing continuing to come via the intermediary. It’s a competitive space and we will see how sustainable/sticky that is over time. Execution only clients are fundamentally different to advisory clients, regardless of wealth. The type of client that came for transactional advice 5 years ago, when they had some investment money, went to a qualified human being rather than Google. And they did that for a reason which, for them, probably hasn’t changed. Regardless if intermediaries take the route described in Iain’s article some of the legacy platforms will still be left with a problem.

I don’t have a crystal ball and there are plenty of people smarter than me where it matters, but the assumption has to be that at some point the big platforms will take the bull by the horns and start resolving the issue themselves. They probably can’t simply put clients straight into a stand alone platform fee circa 30bps as you then leave yourself exposed as attempting to undercut the advisory market which remains hugely important to the providers, especially when those very advisors introduced these clients to the platform in the first place. You also have an additional cost introduced on the servicing front that you generally avoid when business is intermediated. The outcome? Probably a servicing/platform charge nearer to 0.75% for what then becomes, to all intends and purposes, a separate execution only/light guidance proposition. If you then had a discounted fund range (dare we say super clean) or in-house proposition that brought the total cost of ownership below the 1.5%, that most of these clients are currently paying, you’ve arguably introduced the incentive that the clients need to act. Some of those jigsaw pieces have been appearing in recent years.

Albeit this then leaves platforms/wraps as a potential competitor to the very market they are so dependant. If they deliver the guidance piece too well then their core client base (advisors) will be up in arms. And, in a heads you lose tails you lose type scenario, it also leaves the platforms fair game for all the genuine execution only players out there. Potentially igniting Platform Price War III, lest we forget in the direct market 35bps is still considered high, if you are leading on 75bps you need to be sure that you are can justify the premium. Cue even more Stella Artois inspired advertising; ‘we’re reassuringly expensive’.

My point is that this takes us all the way back to the original argument raised by Iain’s article (it is worth a read). Let’s be frank if the client was going to act they’d be more likely to do it on the back of advice from someone they trust, not because a provider tells them to sign a multitude of papers, but it remains a long and torturous process that is doing no favours to anyone. The outcome, therefore, surely has to be a simpler way of getting clients to cross over into the new world. Platforms certainly have the incentive to find it and should do so now whilst advisors are still involved, not wait until after they have had to take the extreme outcome of walking away. As Iain points out, this has to be made easier across the piece for the benefit of all parties; wraps, platforms, advisors and most importantly investing clients. That is surely in everyone’s best interest? Looking at OM backstop plan (the process of bulk switching to clean and applying a set product/service charge, is already in their t&c’s) on this issue it might not be anywhere near as big a challenge as some fear. Hopefully everyone is equally progressed but the dialogue needs to step up and get out in the open based on the confusion I hear on this from advisors – and the providers focus purely on intermediary trail, as if they’ve barely given second thought to their own revenue….

I believe the year ahead for platforms of all shapes and sizes will be an important one. The Sunset clause challenge is significant and it’s time to acknowledge that it effects more than just advisors and their inactive clients. This has the potential to change the platform/wrap market beyond recognition, good or bad, but however we solve the problem there should be no reason for the ‘sun to set’ on anything without it being an active choice by the investor.