Client: APCIMS Review / David Woodward
Agency: PR2Go
Author: David Woodward
Edited by: RJ Taylor
PLATFORMS ARE BACK IN FASHION
Retail investors increasingly require control of all their assets via a single provider. So, asks David Woodward, did platforms ever really go out of fashion?
Having worked providing Figaro to the stockbroking and wealth management industry for 25 years, I am struck by the fact that platforms are nothing new.
When I first started working for stockbrokers they would typically be responsible for all of their clients’ wealth. The cash was invested in many different types of asset, all using different, mainly manual, methods. At the year end a junior in the front office (probably ex-army) would put together a report listing all the different holdings and plans and the client, Mrs Miggins, would receive a lovely letter bringing it all together.
Given that many of the assets contained within these products were equities, and that the broker would change his mind a few times during the year, there was a reasonable commission earned and the broker was happy to offer such a tailored service. There were other charges such as custody or management fees, but these would all be calculated before the year end and included on the annual statement.
Therefore a much smaller percentage of Mrs Miggins’ assets were held in products with hidden charges. The Retail Distribution Review (RDR) was not even so much as a glint in the regulator’s eye and wasn’t necessary anyway, as all the charges were on the statement.
Right from the beginning, JHC’s clients wanted to provide a complete service to their customers with a system that reduced the administration by both consolidating all relevant assets in one place and linking to all the product providers.
This meant providing some key components:
1. Consolidation of products either at the individual or family level. All of the reporting, performance calculation and exposure is calculated across groups rather than individually. This is simplest to visualise from a web point of view: A single login gives the customer an immediate and up-to-date view of all their positions, all grouped together in one place.
One of the principle benefits of product consolidation was clearly demonstrated when we began to produce single annual reports to each household, rather than weighing the postman down by a sackful of reports, each regarding a single stock. Oh, the joys of multiple ISAs!
2. Crucially, all the accounts needed to be managed as a single relationship. This means that fees are levied across the group of accounts and posted to a designated account. Deposit interest is calculated on the consolidated balances, thereby giving the customer better rates. Client payments can provide regular sums to multiple beneficiaries, regardless of where the income is generated.
3. Finally the firms need to agree wholesale rates with the product providers. This means either managing the cash and assets on a pooled basis or at least fooling the providers into thinking that you are doing so. An obvious example of this is pooling all the client money in to a single account that can then be split up to get the best rates, but equally important is to consolidate the fund holdings to negotiate better rates of trail – the heady days when the perils of RDR were way off.
For much of the 90s JHC worked at bringing all of these factors together.
There followed a period where customers began to “shop around”; They were encouraged to use Independent Financial Advisors, as there was an underlying feeling that the traditional stockbroker was taking advantage. How naïve we were!
Some years ago an Australian software house came to visit JHC with an exciting new idea. The Australians, they said, were many years ahead of the British. (This was of course before we had beaten them in the Rugby World Cup and regained the Ashes.)
They wanted to explain to us the concept of a “platform”. After a couple of hours we realised that we were in danger or re-enacting the French Castle scene from Monty Python and the Holy Grail. I could just see them asking me to go to our clients to offer this new platform solution and waiting to see the look on their faces when I said “Well, I’ll ask ‘im but I don’t think ‘e’ll be very keen… ‘E’s already got one.”
Even back then, JHC’s clients had already been offering consolidated cash, equity and unit trust accounts for many years. We just hadn’t realised that we had a platform until someone else called it that. JHC added automated unit trust trading and reconciliation to the Figaro system along with equities, gilts and overseas stocks and currency accounts early this century.
Initially, IFAs had direct relationships with the fund providers and use a stockbroker to buy only equities and gilts (although they would rarely recommend this course of action as they didn’t earn trail). The equities would sit in the broker’s nominee.
One of the things that has changed since then is that IFAs tend to want to hold their equities in an independent nominee rather than with a particular single broker. Additionally, they want to be able to use multiple providers for different products without facing the complication of many different relationships.
This is key because firms are typically valued based on the value of their assets under management (AUM) and this is far easier to calculate if all funds are all readily available in one place. As the market has got more competitive IFAs are also employing sales teams who are remunerated based on AUM targets – another reason to make it easily accessible.
This is where the IFA needs either a modern, sophisticated platform, or a broker using a system that will allow him to hold the stock in his own nominee.
It is perfectly reasonable for an IFA to use more than one firm for discretionary mandates but it does mean that there needs to be a consolidating system to bring it all together. This means that platform providers who can be product agnostic are attractive. This isn’t necessarily so good for Mrs Miggins as she will end up paying two levels of charges; one to the platform provider and one to the product provider, but at least under RDR she might become aware of this.
Another side effect of this is that the brokers end up having to connect to many different platforms to avoid the need to manually perform the updates each time they rebalance.
So we have come full circle, and platforms are once again back in fashion. When I started in stockbroking Mrs Miggins trusted her broker, gave him all her money and then hoped for the best. Then we were all told that IFAs were the way ahead as their independence meant that they would be fair and balanced – which they were, when they provided products which all paid the same rate of trail. Now we have RDR, and Mrs Miggins will once again be looking for a single place to house all of her assets.
The big question is this: Will she now be attracted to the fashionable new platforms? Or, with a nod to vintage chic, will she return to her broker who has been offering her platforms all along?
David Woodward is Information Services Manager at JHC Plc.
Monday, January 10, 2011 at 13:48