International Adviser sister publication Portfolio Adviser understands fund managers are demanding significant inflows before they offer discounted fees. Some mega-sized funds require inflows upwards of £500m ($656m, €562m) annually via a platform before they will offer a discounted share class, according to one person in the platforms industry.
The FCA investment platform market study interim report indicated scale is required for driving down fund charges, but the industry has argued the real leverage comes from buy lists, such as the Hargreaves Lansdown Wealth 150+, or other platform features that drive flows towards specific products.
Just £47bn of the total £500bn held via platforms in the UK is in discounted share classes, the market study report says. The FCA wants that to be much larger.
Open architecture
Aegon pensions director Steven Cameron says it is important to distinguish between open-architecture platforms and those that offer best buy lists or a limited range of funds, noting the former does not have the same negotiating power because they do not influence where fund flows go.
Cameron says: “We had hoped the asset management market study would place a requirement on the fund managers acknowledge that if a platform has really big scale it would be appropriate to reflect that in the price they offer.
“Unfortunately, the FCA didn’t go that far, so for us this remains an issue.”
Aegon holds the most assets under administration (AUA), sitting at £90.5bn, ahead of direct-to-consumer (D2C) platform Hargreaves Lansdown with £82bn and Fidelity, which caters to advisers and retail investors, with £76.9bn.
Aggregators or influencers?
Baillie Gifford director of retail marketing & distribution James Budden agrees volume alone is not enough to sway asset managers to discount funds.
“Having large fund flows is not enough on its own to justify a lower price. Platforms need to show that they are not simply aggregators,” Budden says.
“They should be actually influencing flows and driving volumes. When this happens asset managers may be in a position to work with platforms on price. Most often this is done through lists of recommended funds and the provision of model portfolios.”
Small and large platforms alike can take this approach, he says, contradicting the FCA view that platforms with less AUA don’t have the scale to drive more competitive fund charges.
However, Architas argues investors should get the best pricing regardless of what platform they use.
In July, the multi-manager introduced its superclean share class across all platforms shifting the competitive advantage held by large players in the market.
Head of UK funds Sarah Ackland said Architas wanted to reflect the prevalent use of multiple platforms by advisers. “If you offer differential pricing across different investment platforms it can be quite difficult for an adviser to understand the fees they’re paying across multiple platforms. Consistency of a pricing provides clarity and ease for advisers,” Ackland said.
Contradictory stance
Existing rules for advisers and platforms make the FCA stance somewhat contradictory, according to Lang Cat consulting director Mike Barrett.
“The regulator needs to have the view that if you’re expecting the platform provider to negotiate with the fund group then how to do you square the circle that they can’t present these funds with any bias,” Barrett says.
“You’ve also got to recognise that a lot of platforms are vertically integrated and how realistic is it to expect them to promote competitors’ products on the platform.”
Advisers are required to use platforms that don’t present products with bias, while D2C platforms must be careful not to push a fund to the degree that the client thinks they’re getting advice or a personal recommendation, he says.
Powerful negotiating tool
Buy lists drive a lot of fund flows, says Platforum associate research director Rodolfo Crespo Rivero.
“I agree that having guided architecture solutions – such as best buy lists – could be a powerful negotiation tool for platforms when coupled with significant scale. However, scale itself can also be a factor platforms can leverage on if they look to secure better deals for their customers,” says Crespo.
Hargreaves Lansdown was widely regarded as the platform best using its preferred funds list to drive discounts from asset managers.
For example, the Wealth 150 includes a 0.15% discount on the Woodford Equity Income fund, which it has stuck by despite a number of intermediaries pulling cash due to underperformance, and 0.19% discount on Lindsell Train UK Equity. Fees are even shaved from cheap passive solutions like the L&G US Index fund, which is offered for a 40% discount at 0.06% net ongoing charge.
While the FCA argues consumers benefit from discounted fund fees, Barrett says that may not be the case when total cost of ownership is taken into account.
“The FCA data put out last week showed the average discount is 8 basis points, which isn’t particularly big anyway.
“Using Hargreaves as an example, a discount of 8 basis points on their fund range when their platform fee is around 20 basis points larger than some of their biggest competitors, like AJ Bell, Santander, Interactive Investor and so on, means you are better off buying the non-discounted version of the fund via a cheaper platform.”
For advisers too, platform charges tend to be higher for firms that negotiate down fees, he says.
The role of platforms
Aegon does not consider that it should be influencing fund selection, says Cameron.
“Our platform is intermediated, it’s an adviser platform, we think that’s for advisers to decide not for us in any way, shape or form to influence that decision.”
Miton chief executive David Barron says commercial discussion around fees and terms of business is “very much” between adviser and the fund management business. “The platform is facilitating that arrangement.”
Barron adds: “In some of the platforms where they’re offering managed solutions then there is more of a discussion. The real question is what the role of platforms in the value chain is. In the D2C market there are some platforms who have much influence and ability to shape consumer choice and therefore they can use that as leverage.”
But that is not the current model in the D2C space, he says.
“If they changed their models they could do that. But then if an adviser wants to put their clients’ business on a platform where certain funds are excluded because certain terms haven’t been agreed then what’s the adviser going to do then? They’re going to move their business to another platform.”
Indeed, investment choice was ranked as the second most important platform feature after costs in Platforum’s quarterly adviser survey.
But it comes with a trade-off in terms of costs, says Crespo.
