Our thoughts on the asset management market study

5 July 2017

FCAAnother regulatory paper and another round of speculation, comment and observation abounds in the media. It’s all too easy to become caught up in the feeding frenzy – should one discuss and criticise, review and reflect, pontificate, or simply ignore and carry on…

I (like many others I suspect) tend to do all the above, however stepping back the most valuable approach is to try and gain a sense of the direction of travel and consider how we, as a platform and product provider should prepare. And importantly, consider what this may mean for our clients.

 

As a platform provider, I found it useful to consider three key elements;

 

  • The likely provision of more data both pre and post-sale
  • The announcement of a further study into the platform market
  • The explicit focus on ‘value’.

 

It was way back in 2006 that Callum McCarthy first outlined his vision for financial services, a vision which included increasing the ‘financial capability’ of the consumer or put another way, developing an engaged and financially literate public. Eleven years later, with countless millions spent and the RDR now embedded as business as usual I must ask – is the investor any further forward?

The asset management market study (AMMS) still refers to investors being unclear of the objectives of the fund they invest in and how the performance of that fund is measured. This is a basic requirement for any investor and if we accept the research undertaken by the regulator as correct, then it does beg some serious questions.

As a platform we will work with fund managers and our technology suppliers to deliver appropriate information in plain English that supports the consideration and review of any investment instrument and vehicle.

MiFID II has already introduced the requirement for more frequent performance updates and ‘alerts’ when investment performance significant declines. I’m not convinced consumers will be any more engaged, but they will certainly be more aware – our platform needs to consider how we best support this for our intermediary clients.

 

That the regulator sees fit to announce a further review of the platform market confirms that the FCA believes the market is not as efficient as it should be. Three areas stand out:

 

  • Vertically integrated firms
  • Pre-2012 commissions
  • Improving competition between platforms.

 

Many commentators have challenged vertical integration. And admittedly, it’s difficult to see how the investor has benefited assuming he is paying similar (or more) for products and services that ostensibly produce the same outcome from a truly independent process.

Vertical integration is not of itself a bad idea, but surely efficiencies must be passed on in some way to the end consumer and the regulator is clearly disturbed by conflicts of interest “potentially creating distortions in the retail distribution”.

Another area of interest to the regulator is those firms who continue to benefit from legacy commission. I would argue most advisory firms have either moved clients to an adviser charging model or discontinued working with legacy clients. However, the older style D2C firms will see this as a threat and need to consider how to engage with those clients who are still in a commission paying share class and how to move them to a service based charging model that is fit for purpose.

 

The final element of the review to note is the line of “improving competition between platforms”. Essentially this is about removing barriers to switching platform suppliers. The in-specie transfer process and access to ‘super-clean’ share classes are two areas the regulator will need to review.

 

Our stance is simple: we offer choice, efficiency and value.Therefore we have put ourselves at the heart of the three issues outlined above. If we as a platform remain true to our vision, and continually challenge ourselves to do just that, our model and that of our clients are well aligned – and aligned with the direction of travel indicated by the regulator.

 

The final point I mentioned was value. This is important, because looking forward we can see the track the FCA are following. Firstly, by challenging asset managers to demonstrate value and price competition, and secondly by moving the same focus onto platforms.

It’s not inconceivable to suggest that at some point the intermediary will be challenged in a similar vein. This, at a time when advisory profits stand at 17.1% of revenue (a decline from 19.11% in 2009 and a peak of 25.39% in 2013) and face further cost headwinds in the shape of MiFID II, which will test the commercial model of some firms. Intermediaries would be well advised to get ahead of the curve. Simple exercises such as market reviews of local competitor pricing, an external audit of services (and delivery against them) and regular, evidenced reviews of technology and product suppliers are one such way of achieving this. And good business practice to boot.

 

That is a task for the intermediary – however we have too a part to play.

 

As a new entrant into the platform space we aren’t hampered by legacy assets (multiple share classes and legacy commissions) nor a pricing structure predicated on cross-subsidising and expensive to manage back books. Therefore, a clean platform, efficient technology and genuine STP benefits will all allow us to share the value with a competitive price point, full investment universe and genuine digital engagement.

 

Time will tell if the specifics of the analysis prove correct. However, we will be keeping a very close eye on developments. We will also continue working to ensure that in areas where we can add value and make a positive difference to the way you operate now, and how you will need to operate in the future, then we will do so.