In this edition of Technical Update we look at platform pricing and the future for Financial Planners' fees in this context. Most experts believe that effective use of an investment platform can result in significant administration and cost efficiencies. This can lead to more efficient administration of client investments and is often seen as one of the key benefits of platforms.
However, Simon Olive of AXA Wealth believes that some commentators make a false assumption that these efficiency benefits must lead to a reduction in the fees firms charge for their services. Mr Olive says that platform technology only has a direct impact on the element of adviser charging related to implementation and administration of the selected client investments.
Because of this he says that many other aspects of a Financial Planner's role which add value – including strategic advice, tax planning benefits, on- going progress review services and so on – mean there can and should be room for appropriate fees to be charged. He believes planners who fail to see this could be cutting their own fees at a time when they should be increasing them.

Platform pricing and its impact on planners' fee models

It is widely agreed that the effective use of an investment platform facilitates a greater efficiency in the administration of client investments than traditional provider facilities can deliver. Some commentators make an erroneous assumption that these efficiency benefits must lead to a reduction in the fees firms charge for their services. However, platform technology only has a direct impact on the element of adviser charging related to implementation and administration of the selected client investments.
The aspects of a Financial Planner's role to which clients attach highest value involve strategic advice, tax planning benefits, ongoing progress review services and a relationship where their issues are at the forefront of the planner's mind.
Therefore, the primary factor in determining the price a client is charged should not be the time taken to administer products, but the value of the expertise required to resolve issues that clients regard as complex enough to warrant the engagement of a trusted Financial Planner. It does not automatically follow that the overall charge should be lower than the remuneration a firm may already receive, as that presumes the current charge was appropriate. Typically, many firms adopt trail commission of 0.5 per cent as their sole means of reward for ongoing service delivered to any or all segments within the client bank. This leads to a cross-subsidy effect often referred to as the 'Robin Hood Syndrome' and differs greatly from a considered pricing strategy.
The Retail Distribution Review requires business owners to create a sustainable, profitable pricing strategy, free of provider influence and cross- subsidy. This provides a great opportunity to widen the focus of a firm's perceived value to include not just the identification of suitable products but also the delivery of strategic planning, detailed advice, ongoing service and a trusted relationship.
Achievement of a fair and healthy level of profitability by a Financial Planning business is something from which clients should take comfort. Clients running their own business would be concerned if their Financial Planner was not operating on a profitable and sustainable basis. Businesses which only just break-even tend to be characterised by owners and staff operating under stressful conditions, which is not conducive to helping clients create and manage a meaningful financial strategy of their own. Profit enables a firm to invest and improve its value to clients, develop and reward staff, reduce risk and maintain their ability to be pro-active and reactive when required. It also helps to keep the owners motivated.
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Over recent years, the range of costs that business principals need to cover when creating a pricing strategy has grown to encompass aspects which either did not exist when the business was formed, or have assumed a much more significant share of the running costs than was previously the case. Not all of these costs are spent on unproductive issues but all need to be taken into account when prices and profit forecasts are created. For example:
Financial Services Compensation Scheme fees professional indemnity premiums and excess levels increased capital adequacy requirements compliance and regulatory reporting and fees time spent on professional development resource required to trace and administer client policy data from a significantly 'merged' pool of traditional insurers.
A hidden cost in many businesses is represented by the human effort required to simply specify, organise and report on client investments held in a range of traditionally administered products. To operate a cost effective and meaningful client investment process, key requirements include:
-timely and accurate maintenance of a client's asset allocation
-the ability to re-balance, switch or redeem investments in a timely way
-instant access to up-to-date valuations and performance data
-flexibility and control to adapt a client's investment strategy in the light of changing circumstances as their financial journey progresses without costly restructuring and time out of market
-optimising tax allowances.
How easy and cost effective is it to satisfy these requirements when clients have an array of funds spread across a wide range of products and platforms? A firm managing hundreds of clients' assets across a multitude of sources exposes all their clients to significant risk as it hinders the firm's ability to act promptly and efficiently in respect of:
-switching, adding or withdrawing funds
-monitoring performance and providing accurate information
-managing asset allocation, diversification and re- balancing issues.
Such hindrance increases the risk of a firm:
-missing things - not maximising tax benefits, inappropriate asset allocation, misalignment of portfolios to risk tolerance
-being unable to exit quickly enough
-exposing clients' holdings to market movements while making changes
-incurring extra charges, costs or delays having less time on strategy and service.
There is a difference between a 'cost effective' approach and an approach which makes the mistake of setting the criteria as 'cheapest is best'. If it is inappropriate for resource, time and expertise to be wasted on efforts to administer investments held across a range of traditional products and providers, the same logic applies to the selection of platform-based solutions. The FSA accepts that for client groups where needs are similar and suited to benefits of a platform, the use of a single, suitably comprehensive platform solution will not jeopardise Financial Planners' independent status.
This does not remove the need for a double check that a platform-based solution is suitable for each client and all their assets. However, it also means the 'cheapest' route doesn't have to be recommended once a strong value-based proposition has been enabled by a platform assessed as a strategic fit with the firm's desired client proposition.
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A predominantly single platform strategy means the firm can deliver better investment management and service through:
-a quicker and more accurate consolidated picture of a client's holdings
-monitoring and maintaining the right asset allocation across all tax wrappers
-being better able to manage tax reliefs and allowances
-identification of all clients invested in a fund that might need to be sold quickly
-monitoring holdings across a variety of product wrappers to ensure they are aligned with a client's objectives, attitude to risk and so on.
-having more time to focus on clients' overall strategies and planning needs as well as being accessible to respond to their enquiries, needs and concerns.
A superficially low cost product portfolio could actually be extraordinarily expensive to manage and should often require a higher administration charge than is currently charged. Inefficiencies in any operating model reduce a business's capacity to deliver value to all clients, an invisible cost that never features in a 'reasons why' document. The efficiencies created by a consistent approach to investment management benefit every client in terms of value for money and should be highlighted both in suitability documentation and also emphasised as a way of differentiating from competitors.
The better platforms for a Financial Planning service deliver flexibility and comprehensive options in terms of pricing, planning tools, active, passive and blended strategies, open fund universe architecture, multi-managers, ability to create, administer and re-balance model portfolios or provide access to a number of discretionary fund managers. If a platform has limited options or flexibility, you may be forced to use more alternatives and incur extra cost or risk as clients move through their financial journey.
When a Financial Planning business realises it is running on an unsustainable pricing basis for the delivery of its essential ongoing services, it has four options to consider, although option A is hardly sensible:
A. attempt to deliver service on the current basis, leading to a risk of financial loss, staff reductions, eventual closure and clients left without a trusted adviser. This is not really an option; something has to change
B. reduce services to keep the same price. This is less value for money compared to what clients received before but is sustainable
C. charge more (perhaps twice as much as currently paid) to retain the service. There is nothing fundamentally new about the services offered, hence less value for money than before
D. move to a new client service proposition that delivers better value than all the other options, maybe at a higher price than today in option A, but probably less than in option C.
Option A is a flawed model which does not really bear comparison with the other options. Options B and C do not really represent a meaningful modernisation in the business model and services offered. Option D addresses the need to continuously improve services at a profitable price. Clearly, migration to a platform in respect of some assets may be inappropriate due to specific product features or significant exit penalties or creation of chargeable events. However, in principle, businesses should always seek to examine ways in which benefits can be enhanced without assuming clients will fail to see the value available, even at an increased price. To demonstrate the value offered to clients, Financial Planning firms need to develop a fully documented service proposition. Suitability reports need to highlight the limitations and risks of the current model if sustained with the way the new service and reviews can improve overall value.
In the absence of a defined client proposition, all an auditor can evaluate is the differential between one tax wrapper and another. A bare proposal to simply move to a platform approach and increase service fees would send a message that the client is, in effect, paying more for a service that costs the adviser less. Alternatively, a clear client proposition featuring investment management on a platform can be regarded as, effectively, an upgrade in the better overall and long-term interests of the client - even if the price happens to be higher, within reasonable limits, than the previous proposition.
The move shouldn't be judged on cost reduction or increase, but on the basis of whether the new proposition enables the client and financial planner to work more effectively on harnessing the client's resources to increase the probability of achieving the lifestyle they desire by way of a valued and dependable service. In the words of John Ruskin: "There is hardly anything in this world which some man cannot make a little worse and sell a little cheaper and the people who consider price alone are this man's lawful prey, as it is unwise to pay too much as it is to pay too little. When you pay too much you lose a little money that is all.
"When you pay too little you sometimes lose everything, because the thing you bought was incapable of doing the job it was supposed to do."

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