Platform Paper - Holly`s take
Having digested the FCA’s Platform Paper (the snappily titled MS17/1 Investment Platforms Market Study) there are 4 areas which stand out for me.
First up – the difficulty of price comparison
(View in a nutshell – bloody impossible; needs fixing; do it or have it done to you)
I think the regulator has given the industry lots of warning signals about the remaining complexities about price comparison. It is simply too hard. I have been compiling Excel spreadsheets since 2002 which calculate the vagaries of pricing.
Perhaps the biggest problem is that the industry remains either unaware or dismissive of the fact that many people do not understand the difference between the tax wrapper and the investments. This understanding remains a key requirement to navigate most pricing structures – you need to total these two and qual testing shows that most people fall at this hurdle, failing to understand the difference between a fund charge and a platform charge.
Having a simple calculator or sliders which reveal an illustrative annual charge in £s is a must. The clarity of charges now has to be a core factor to consider when working out the pricing model itself.
When I was a spring chicken back in Oz, writing platform documents in about 2002, the regulator mandated parameters for cost illustrations. If the industry cannot fix this I would be happy to suggest a working model to the regulator to ensure consistent disclosure and comprehensible disclosure across all platforms.
Secondly – risk labelling of bundled solutions
(View in a nutshell – lacks consistency and spurious adjectives don’t do the job)
The risk labelling of funds is something we have tested many times. It is confusing for people. Aggressive and Ambitious doesn’t mean much to most people as financial constructs. Furthermore we know from our robo performance comparison work that one person’s ‘4’ is another person’s ‘6’. There is no consistency which again makes comparison and comprehension unclear.
These bundled solutions are a growing trend. Even the more sophisticated investors we talk to have increasing awareness that their monitoring and tweaking and charting might actually be contributing to a sub-optimal experience. So this is not just for the less confident. With some £38bn of today’s £189bn+ in platform-brand models and compound annual growth rates of circa 40% a year since 2011, making sure that these ready-made options are well understood and properly described is key. And this is not just a job for words – don’t forget images, design and video too.
I don’t pretend this is easy nor do I see that prescribing consistent terminology is appropriate or effective – this is not a communist state. VaR is too confusing. Adjectives don’t work. I suspect the answer is better communications and visual snapshots which make the potential outcomes much easier to compute and clearer to take onboard.
Thirdly – cash on platforms
(View in a nutshell – it’s too high but the FCA needs to help platforms feel able to ‘nudge’ their clients)
Levels of cash sit at 8.8%. Spookily the FCA’s number used in the report is exactly the same as ours! ;0)
This has remained fairly consistent over the years. The irony here is that I have talked to a platform about a campaign to try and give unintentional cash customers a nudge. And their compliance team pulled the pin because this was too close to advice.
These levels of cash are not typically active asset allocation decisions but apathy or uncertainty. Platforms should be able to prod clients, ask the question and help table alternatives.
Fourthly – switching and exit fees
View in a nutshell – switching times are a joke but I don’t support a total ban on exit fees
Switching is ridiculous. I remember once switching something from a Cofunds-administered platform to Fidelity. It was an ISA with 2 or 3 mainstream funds in it. After 10 weeks I got so frustrated with both parties blaming each other that I got Cofunds on my mobile, Fidelity on the landline, chucked them both on speaker and sat there like an idiot as they became unable to blame each other and actually got the transfer done.
Some groups are clearly much better at this than others. I think disclosure of average switching times will be a very effective carrot or indeed stick here.
As for exit fees I do have some sympathy with the platforms here. There are a number of rate tarts out there still who will move around on a regular basis. Not many – but a few. There are also strange portfolios. I talked to a man once who held 74 funds in a SIPP worth about £70,000. He wanted to in specie transfer these funds off to another provider. Ooof.
The truth about all and any activity on platforms is that some customers end up subsidising others. This is true of trading and most activity. Exit fees should be better explained and certainly capped. But if you ban them then – on the probably inaccurate assumption that pricing in this industry is logical and worked out in a more mathematical way than looking at what everyone else does – then every customer will pay for the activity of a few.
We will be handing down our consumer research into risk labelling at our The Boring Money Annual Conference on 26th September, supported by News UK, The Times readers and with contributions from psychologist Paul Davies and advertising and branding expert Lucian Camp.