The last 12 months have seen huge change in the platform market, but how much further will it go, and how will these changes impact the financial planning community?

Nicola Brittain reports...

The last 12 months have seen seismic change in the platform market led in large part by the FSA platform paper PS13/1. The paper, released in April 2013, banned commission on new business from 6 April 2014 and introduced new rules banning commission on legacy payments - dubbed a 'sunset clause' - to come into effect on 6 April 2016.

David Cross, FCA press officer, said that the motive behind this was "the desire to provide the consumer with enough information to 'shop around'." He added: "We wanted to create a market in which there was effective competition."

Most Financial Planners and market commentators agree that the reforms have increased competition in the market.
New pensions legislation introduced in the 2014 budget has also put some heat into the market and is likely to result in more pensions investment and consolidation on platforms, according to Richard Hulbert wealth analyst for Wealth and Protection at Defaqto.

Although the commission ban has undoubtedly been disruptive for many platform operators, particularly those with the old supermarket model, Jonathan Gunby, Transact's chief development officer, explained that he thinks now is a good time to be in the industry.

"Lots of platforms are doing very well," he says. "Matrix data shows that 88% of all new adviser investments are on platforms and that there has been 20% platform growth year on year."

He adds: "Platforms are making money and advisers are increasingly sidestepping life companies and going straight to fund managers via platforms."

Following the release of PS13/1, the vast majority of players in the market are offering clean share classes. This is an unbundled form of share class in which the payment for the adviser, fund provider and platform administration are separated out. Clean share classes aim to makes fees more transparent to customers and eliminate commission.

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Bundled classes are still allowed as long as a rebate is paid to the client. Skandia, a platform known for striking aggressive deals prior to RDR, is one platform still using this bundled share class form. In doing so it has avoided renegotiating its pre-RDR deals and is therefore able to offer many funds for between 5 and 15 bps less than other platforms, according to Mark Polson managing director of The Lang Cat.
However, Defaqto's Mr Hulbert says: "rebates are proving unpopular with clients and advisers due to extra paperwork and tax implications." As such, he says he expects to see their use decrease over time and adds: "This may damage platforms that have opted for this process, particularly in the short term."

Super-clean share classes are another variation of share class and the result of discounts on clean shares offered by fund providers and passed on to financial planners by the platforms.
However, this type of share class is relatively rare and several industry commentators expect that they will not be in the market long. Martin Bamford CFPCM of Informed Choice says: "I suspect super-clean share classes are a temporary phenomenon and that all fund pricing will drop to more or less the same level. Many platforms are not profitable and simply cannot afford to offer discounted shares of this sort over the long term."

The commission ban and proliferation of clean share classes has already put considerable downwards pressure on pricing.

Jon Everill, head of advisory services, Fidelity FundsNetwork, says: "The FCA was determined to drive competition in that market and it has done so. Platform fees have come down by as much as 50% over the last five years."

"The problem is though, the cost of administering a platform hasn't gone down, and in many cases has increased and this is likely to continue as platforms work out how to move legacy funds away from the commission model." Mr Everill argues that the smaller platforms in the market are more exposed to pricing pressure and are therefore more likely to fail.

The beginning of the year saw several D2C platforms embark on a price war as they revealed their new unbundled pricing. The signs are that adviser-focused platforms are beginning to compete in the same way.

AJ Bell, described by The Lang Cat's Mr Polson as a quiet giant in the SIPP space, announced its new pricing structure last month and freely admits that it competes on price. It offers a headline platform fee of 20bps, compared with the average platform price of between 30-35bps according to Billy Mackay, marketing director at AJ Bell.

Mackay adds that the company will continue to be competitive on price but that it also has another string to its bow, a strong SIPP offering. He explains that this will be in particular demand following the Budget 2014 changes which injected flexibility into the pensions market.

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Transact, a platform better known for its service than cheap pricing, has also announced several price cuts over the last 12 months including a reduction in annual commission charge and removal of the establishment fee for setting up a wrap.

However, Jonathan Gunby chief development officer for Transact, maintains the importance of "responsible pricing." He says: "There is no doubt our fees are important, and we can't move too far away from the prices charged by other platforms, but we don't want to jeopardise the service to the end customer or adviser. In our view, there is a strong correlation between price and quality."

He adds: "Many platforms are losing money but they can't be loss-making entities forever - there will be a floor when these players will stop competing on price."

AJ Bell's Mr Mackay explained that according to his company's analysis, price is the most important consideration for financial planners when conducting due diligence on a new platform.

However, he concedes that planners also look for service, fund range and other services such as tax calculators, model portfolios or cash-flow modelling. How important each of these is will differ according to the planner's needs.

Transact's Mr Gunby take this a stage further and argues that because platforms are at different stages of evolution, with many old supermarkets still unable to hold VCTs, ETFs or investment trusts, other factors such as fund range must be equally important for planners.

"Clients with low-level holding such as ISAs might be better with a platform like Fidelity or Cofunds, while clients with pensions, bonds or trusts will be more suited to Transact or Nucleus."

Similarly, Ian Shipway CFPCM at HC Wealth Management is adamant that price is not the main determining factor for him.

HC Wealth Management uses Succession and Transact and Mr Shipway said: "We chose both these platforms because of their open architecture - they can handle all the investment products that our clients need."

"We have used very low-cost platforms in the past such as American Express and Elevate, but they simply don't offer the right sort of support. Many low-cost platforms are very technology driven and don't have a help desk. But in my view human interaction is necessary - the vast majority of jobs require that paperwork be shifted."

Mr Shipway argues that price is a negligible consideration for him because platform prices tend to be close, with just 10bps or less between the most expensive and the cheapest. "The difference is only ever a matter of a few basis points," he says.

The Lang Cat's Mr Polson argues that there are likely to be several changes to the way financial planners operate with platforms in future. The change he would most like to see, he says, is that financial planners pay directly for their use. He explains that the current model - in which the client pays - stems from a time when advisers were seen as a means of product distribution by platforms.

But now that advice is considered more important than the sale of products, planners and advisers should view platforms as part of their back-office service and pay for them as such.

"In my view, the wrong people are paying for platform services currently," he says. "Platforms are an administrative advisory tool. A stockbroker might use the Figaro system in his back office, but would include the cost of this in his general costs to the client - I believe the advisory market should copy this example." Mr Polson expects changes of this sort to begin to take place over the next 12-24 months.

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He argues that another 'ghost in the machine' is the continued use of percentage charges when administering investments. He argues that this is unfair because the cost of administrating a large investment is the same as that of a small investment, meaning that wealthy clients end up paying over the odds.

However, Mr Polson argues that this is beginning to change too. "Aegon recently put a cap on its charging structure - it is the first to do so but won't be the last," he says. "As clients read more personal finance stories about charges in the D2C sector they will be more likely to ask questions of their financial planners and challenge percentage charging."

"In addition, a flat rather than percentage fee will be much better for planners because they tend to deal with higher net worth clients than your average adviser. These planners will either be able to reduce the fees to clients or use the additional money to offer further services," he adds.

But not all financial planners are happy with the way the market has changed to date. Carl Lamb CFPCM at Almary Green said that the pricing war makes it harder for advisers to do their due diligence on platforms. "There are approximately 30 different platforms and at least half aren't making any money. There may be market consolidation as a result and this increases the pressure on us to pick the winners," he says.

Lamb, who is currently using Skandia and in conversation with Standard Life, explains that he employs an investment committee questionnaire to assess which are the best platforms for his clients. But he says that this due diligence process is time consuming and costly.

"The cost of running a IFA practice is increasingly expensive, especially taking platform due diligence into consideration," he says. "I expect there will be continued uncertainty for the next two or three years before prices and services begin to settle, but in the meantime we have to spend a lot of time assessing the market."

Like Mr Lamb, Jon Everill from Fidelity FundsNetwork argues that the market may see some consolidation. He says: "The US has a more mature market than that of the UK and there are just five very big platform players there. It is possible that the UK market will go the same way."

However, Defaqto's Hulbert argues that there are significant differences between the UK and US market, including the fact that UK's regulator is stronger, more principle based and less instructive that that of the US, making consolidation more difficult.

And Mr Polson argues there are other factors preventing consolidation: "Merging platforms is a really big job," he says. There may be one or two that do this, such as those platforms sharing underlying technologies like GBST or FNZ, but bringing platforms using different software together is almost impossible."

"Rather than mass consolidation, I would expect to see some of the smaller providers quietly and graciously fail," he adds.

The future

So how will the platforms market settle and how long is it likely to take?

Defaqto's Mr Hulbert said that he expects to see planners and advisers using fewer platforms over the next few years and that this process is likely to further increase competition and potentially drive players from the market. He says: "Streamlining platform use makes it easier for planners to control risk. It can also save them a lot of time."

However, Mr Polson argues that once April 2016 has been reached and platforms have changed their legacy share classes, the adviser-facing platforms market is unlikely to change considerably.

He says: "There may be some minor consolidation and a few smaller platforms falling away whilst remaining platforms offer a slicker and better user experience. As I have said expect to see increased use of capped costs and perhaps advisers paying direct for the platforms."

He adds: "In my view, the platforms that cater to financial planners are already pretty advanced. It is possible that there may be big change in the automated, remote or restricted space with potential new entrants including Amazon and Google, but platforms in the adviser space are pretty well evolved."

Three key points:

1) "Matrix data shows that 88% of all new adviser investments are on platforms and that there has been 20% platform growth year on year." Transact's Jonathan Gunby

2) "The FCA was determined to create a transparent market and drive competition in that market and it has done so. Platform fees have come down by as much as 50% over the last five years." Jon Everill head of FundsNetwork Advisory Services.

3) "Many platforms are losing money but they can't be loss-making entities forever - there will be a floor when these players will stop competing on price." Jonathan Gunby chief development officer Transact

Biography

Nicola currently works as a freelance financial and technology journalist. She regularly writes for trade titles IFAonline and Investment Week. Prior to working for IFAonline she worked as news editor for Incisive Media's Computing Magazine and technology editor for Emap's Broadcast Magazine.

Nicola is currently studying for a masters in Creative and Life Writing at Goldsmiths University. Her first degree was in philosophy and politics with a subsidiary in economics.