Any market which is constantly evolving will inevitably pass though periods of flux when the level of product and service quality can vary from provider to provider. For market users, the question is whether these are short-term issues or long-term problems and ascertaining which providers are most affected. 

Add to the mix uncertainty caused by changing regulation and the problems magnify both for those offering and using services in that market. The platform market currently finds itself in this state of flux, at the centre of which is the Retail Distribution Review (RDR).

There is no doubt that the RDR has propelled the platform market forward. According to financial services industry consultant Defaqto, while it took 10 years for assets under management in the platform market to break through the £100bn barrier, which occurred in early 2010, twelve months later, as the financial advice arena began firming up its decisions regarding RDR, the figure had leapt by 50 per cent to £150bn. This is a market that is taking off and in consequence, it is one of rapidly increasing competition. With Zurich poised to enter the market soon, specialist consultancy The Platforum records 26 platforms now targeting the Financial Planning space.

However, the RDR is also holding the market back, as the FSA’s August platform policy paper failed to deliver the expected final rules on several key issues. This has impacted not just platform operations but more significantly, Financial Planners’ ability to undertake accurate due diligence and platform selection.

Without knowing what the final playing field will look like it is difficult to choose the players with the right kit and the capability to play the game post 2012.

One of the critical issues arising from the RDR is whether the FSA will allow a Financial Planning group to utilise just one platform across its entire client bank.

The FSA policy paper published in early August made it clear the regulator did not believe a one-size-fits-all adoption of a platform could work in the best interests of the consumer but it has not made this view a prescriptive one.

Commenting on this, Fraser Donaldson, insight analyst at Defaqto, writes in the group’s latest Outsourcing report: “The regulator’s belief that no single platform will be able to serve the needs of all clients should be the guiding principle. Further, the regulator will be highly suspicious of any firm that claims otherwise and these firms are likely to come under close scrutiny. Client needs must take precedence over the needs of the business.”

Accordingly, Defaqto suggests Financial Planners have these choices:

Use a single platform only, as long as clients identified as not suitable for platforms are catered for ‘off platform’.

Use two or more platforms, so that all clients that are suitable for a platform are catered for within the same business. Those clients identified as not suitable for platforms should be catered for ‘off platform’

Clients that are suitable for a platform, but not for a platform currently being used by the planner’s firm, must be referred on if the business is not willing to adopt a more suitable platform.

Fundamental to the process is the ability to satisfy the FSA that the outcome chosen is in the individual client’s best interest. As Mr Donaldson warned: “The FSA has stated that platform advice will become a supervisory priority and there will be tough regulatory action for any breaches.” However, Financial Planners with relatively homogeneous client banks are challenging the need to use multiple platforms in the belief that one carefully selected platform can serve all their clients, with some ‘off platform’ work where necessary.

Shane Mullins, managing director of Fiscal Engineers (winners of this year’s IFP David Norton Business Excellence Award), believes the firm’s relatively homogenous specific client bank makes it viable to use just one platform. “We are very specific about the type of client wewanttoactfor-weputthatonour website. We are very focused in what we are doing and in how we deliver portfolios and we won’t take people who don’t match our criteria. In this situation, to my mind, a single solution platform is acceptable,” he said.

Ian Thomas CFP^CM, the former marketing director of the AXA Elevate wrap, is now a CFP^CM professional and founder of Pilot Financial Planning. Mr Thomas says he has segmented his client base between a core platform, Nucleus, AXA Elevate for clients who have specific investments that better suit that platform, and ‘off platform’ work. As someone who has stood in both the provider and Financial Planner camps he says he sees no issue in using one platform for “a well defined client base”.

“What is important is to have the client at the heart of the decision. It can be as equally wrong to shoehorn people on to one platform as it can be to spray client money across several platforms for the sake of making your split of business look better to the FSA,” he said.

Regular reviews

Mr Mullins added that whichever route a firm takes, “you can’t neglect your responsibilities and you have to keep these things under review. We look at our platform operation every six to 12 months.”

The regulator requires Financial Planning firms to undertake a review of the platforms they use on a regular basis to ensure they remain the best fit for individual clients. This requires a defined process that is well documented.

Tim Page CFP^CM, director of PageRussell, a family owned business that operates in East Anglia and London, had a baptism of fire in creating such a document when the firm’s chosen provider – the Macquarie platform – pulled out of the market unexpectedly in November 2010. The exit meant the directors were particularly wary of signing to another platform without conducting some intensive due diligence work. Operationally, this resulted in Mr Page extracting himself from the day-to-day running of the business and dedicating his time to writing a methodology for due diligence based on the FSA guidelines.

He said: “This covered all the issues that we felt would affect our choice of provider. We had to consider the impact on the business but more importantly the impact on our clients.” It materially affected the operations of the business but, said Mr Page, “ultimately it was a good thing because with this document - which ran to around 25,000 words - we knew we had a gold-plated, FSA-friendly due diligence process in place in plenty of time for RDR. It has made our platform selection and review process far more efficient and enabled us to quickly find a replacement platform.”

RDR ready

Among the major issues the FSA’s August RDR platform policy paper (PS 11/9) left unresolved concerned fund manager rebates and the future shape of charging structures for platforms. For firm’s needing to undertake platform review or selection right now, said Defaqto’s Mr Donaldson, that creates uncertainty and places considerable importance on the other areas of the due diligence process. “These need to be more robust to reduce the likelihood of an unsatisfactory ‘partnership’ for all involved and a costly move in future,” he said.

Shaun Sandiford, business development director at AXA Elevate, warned that businesses cannot take the risk that the platforms they are using at present will be RDR-ready by the end of 2012, they have to engage with platforms that are up and running now. He said: “With little over 12 months until RDR has to be in place, I suggest that Financial Planning firms should be road testing their proposition against their platform now. Importantly, this should include feedback from their clients.

“I don’t think firms should be trying out their proposition a couple of months before RDR. In my experience firms’ value propositions go through various iterations before they get to the one they are happy to roll out to clients. But you can’t do that if the platform you are using or thinking of using doesn’t have the RDR-ready facilities and functionality in place now to support your proposition.

“There are platforms out there saying they will be RDR ready in the second half of 2012. How is that any good to you as a company? When and how are you going to test your proposition if the platform itself is not yet RDR ready? What is more, what confidence can you have that it will be RDR ready in time? The answer is you can’t have that confidence because all you can know is what it does now not what it might do in the future.”

Importantly, Mr Sandiford says, Financial Planners need to be able to provide the right type of investment to the right client segments in their client bank. Damien Rylett CFP^CM, principal of Brunel Capital Partners, concurs, saying a key element in selecting a platform is the ability to operate the investment proposition it chooses through the platform, whether the firm selects the investments itself, uses a discretionary fund manager, or goes down the model portfolio route.

“The platform has to be whole of market and have the flexibility to work with a chosen investment model. Access to direct equities, gilts, structured products and the like should be key in the selection criteria to give the chosen investment proposition as much freedom and flexibility as possible,” he said.

Mr Page said PageRussell’s platform selection was affected by which platforms were RDR ready. “We wanted to remain independent so a fund supermarket was clearly not going to cut the mustard because of the restricted range of investments. Also we wanted to avoid any platform that was having to unbundle its proposition. We didn’t want to be part of the operational change because there is no way of knowing what might happen,” he said.

Pricing and charges

Another important aspect that Mr Sandiford raises regarding non RDR- ready platforms is the effect on pricing efficiencies. “If, come RDR, your business processes do not map efficiently with your chosen platform’s then you could be looking at increased costs that you have not accounted for in your charges to clients. This could mean you have to go back to your clients and tell them you are putting up your fees.”

Avalon Investments managing director Harry Kerr said Financial Planners should not be swayed by headlines rates but should dig down into the details. “If you look around the market there is a lack of openness in respect of charging that can fool an unwary firm. Despite professing the transparency of their offering, some platforms set their charges at an attractive headline rate but this only provides for a certain level of service. The platform will have in place other fixed charges for operations such as valuations, switching funds, setting up Isas and so on - either as flat fees or a percentage of the transaction

“Given economic and stock market uncertainty, top end advisers are likely to want to rebalance client portfolios and may require valuations more regularly. This could see them hit with hidden costs which can quickly mount up and which they will have to pass on to their clients making their own business less competitive. Seeking a platform with a flat rate for an all-in service makes for a far more transparent service to clients.”

Another essential area for Financial Planners to consider, Mr Kerr says, is how the platform actually fits with their day-to-day operations. “Some platforms can be so complicated that the firm’s staff need training and support just to use it. So where the platform is emphasising its online functionality I would urge firms to dig a little deeper – they may find all this means is that they are doing the work instead of the platform.”