David Tiller, Head of Adviser and Wealth Manager proposition at Standard Life discusses the view of inducements in the FCA Platforms Market Study.
It’s not difficult to see why a provider-funded long weekend/conference in Monaco veers towards being an inducement to advisers. But what about the tools and applications integral to platforms that make adviser businesses more efficient? Do they offer client benefits or are they inducements too?
In their 2018 Interim Report on the 2017 Investment Platforms Market Study, the Financial Conduct Authority (FCA) hypothesised that some tools and applications may stray into the realm of inducements. To me, there’s some question about whether or not this is a fair or accurate assessment.
To reach their decision, the FCA divided what’s available to advisers into three categories and arrived at these conclusions:
Category A: This included reporting, management information support and capital gains tax calculators; all of which were seen as having little potential to distort advisers' behaviour and appeared to have some degree of client benefit.
Category B: This included adviser training and consultancy, model portfolio management, bulk rebalancing and switching, and white-labelling. The FCA was unclear what, if any, benefits clients received and were concerned that once advisers were comfortable with a platform and familiar with its function, they could be reluctant to switch to a new and possibly better platform.
Category C: This included retirement modelling tools, cash flow modelling and risk profiling tools. These tools were viewed as helping advisers perform their financial planning service to clients. In addition, many advisers chose to source them from external third parties.
To determine whether tools and applications were inducements, the FCA focused on the core question: ‘Who benefits from them?’
They determined those in categories A and C offered direct client benefits, but since those in category B provided fewer direct benefits to clients, they were a source of concern.
The fact that the FCA is concerned about the benefit to clients of adviser training and consultancy, model portfolio management, bulk rebalancing and switching, and white-labelling should be a concern for every adviser and platform provider.
Are these inducements or do they benefit clients?
A significant proportion of the value of platforms is based on their integrated nature - separating, suppressing and billing services individually adds cost and complexity. In particular, I’d suggest model portfolio management and bulk rebalancing/switching functionality, which are offered by many, if not most, platforms, provide clear and direct benefits to clients.
When I’m talking about model portfolio management, I mean the functionality that enables model portfolio management rather than the provision of model asset allocations or ‘buy' lists. In talking to the FCA, my experience is that its key concern is the potential for ‘shoehorning' or ‘tilt' that exists with the latter, not necessarily the former technical enablement.
Platforms enable advisers to effectively access and efficiently manage a large number of clients' investments. We should be celebrating the huge steps forward in model portfolio management, and bulk rebalancing and switching that platforms have facilitated.
Before platforms, clients were often stuck in the investments proposed at their initial meeting and, as a result, faced higher risk as these diverged from the initial target allocation. The act of rebalancing back to target allocation or substituting poorly performing funds was an onerous and costly exercise - a cost the client would bear. As a result, it was either done infrequently or not at all.
Platform functionality means advisers can rebalance or substitute funds literally at the touch of a button, significantly improving client outcomes while barely changing the cost to them. There’s little point in assessing a client's risk appetite if there isn’t an equivalent process to efficiently manage a portfolio in line with this.
The FCA also identified white-labelling as an area of concern. White-labelling is where a platform provider lets adviser firms present a platform to their clients as a partnership between them and the platform provider. But is basic white labelling really an inducement? To my knowledge, every platform offers this at minimal cost. Can something so universal that carries so little inherent value really influence behaviour?
To be absolutely clear, white-labelling shouldn’t be confused with other more commercial arrangements where the adviser is securing revenues for platform services that are being provided by someone else. Regulatory nervousness here is understandable and was clearly articulated in the centralised investment proposition guidance relating to discretionary fund manager portfolios and distributor-influenced funds.
Courses for advisers cover various things, such as training on how to use the complex technology that is a platform, education that leads directly to improving client outcomes, and business consultancy. Business consultancy is one area that only benefits clients indirectly. However, most providers have assessed these services, and either levy an explicit charge or have discontinued them entirely.
Taking too broad a brush, though, may put an end to activities that do benefit clients. For example, surely training on how to use a platform correctly can’t be seen an inducement? And there’s a direct connection between the training advisers get about tax and regulatory changes and improved client outcomes, so those shouldn’t be an area of significant concern.
It’s important for the regulator to scrutinise platforms and hold the industry to account. But good regulatory intent can easily have the opposite effect to what it intended if not managed appropriately. What I hope doesn’t get lost is that advisers' singular purpose is to look after their clients. Given we have an advice gap in the UK and many advisers are beginning to feel capacity constrained, anything that makes it more difficult or expensive to provide advice is troubling.
What’s clear from all of this is that we, as an industry, need to get better at articulating the benefit to clients of platform services. There’s a quote in the 2018 Interim Report on the 2017 Investment Platforms Market Study that illustrates this: "Advisers' descriptions of how these benefit their clients were mostly limited to the argument that these tools save them time or make them appear more professional."
We can do better in explaining why clients benefit from the myriad of things their advisers are able to do through their chosen platform…can't we?
Standard Life accepts no responsibility for advice that may be formulated on the basis of this information.