The investment platform sector is experiencing a significant increase in the number of customers that remain invested after no longer having a financial adviser – also known as ‘orphan clients’.
Research by wealth management consultant Alpha FMC revealed that the number of orphans has grown by nearly a quarter (23%) last year and by a staggering 185% compared with 2017.
The survey was based on a poll of six small and large UK adviser platform, with combined assets under administration (AuA) of over £260bn ($360bn, €302bn).
The portion of assets held by orphan clients has increased as well throughout the years. In 2020, 1.7% of total AuA belonged to orphans; this compares to 0.27% in 2017.
The Financial Conduct Authority (FCA) has warned adviser platforms that, in the event of clients becoming orphans, the ultimate responsibility falls on the platform to make sure that no unnecessary harm is caused to clients.
Alpha FMC also discovered that 65% of platforms claimed to have put in place “additionally risk management and regulatory oversight processes” because of the growing orphan population.
Only 20% of respondents, however, said they proactively engage with financial advisers to identify orphan clients.
The firm said: “This creates a risk of enabling the ongoing collection of adviser fees from orphan clients given the limited visibility the platform gas on the adviser relationship.”
No adviser, now what?
But what happens when a client becomes orphan?
Bill Vasilieff, chief executive of Novia Financial, told International Adviser that they usually suggest finding a different adviser to look after the customer’s assets and investments.
“An orphan occurs when the relationship between clients and advisers ceases,” he said. “When we are told of the ending of the relationship, we switch off the adviser charge and move the client to standard terms.
“Clients aren’t permitted to make investment decisions as we are an adviser-only platform, and instead we encourage the client to find another adviser, but if not and they wish to be active on their accounts, move their money away to a D2C platform.”
Jeremy Mugridge, Quilter’s head of UK proposition marketing, told IA: “Advisers will ordinarily notify us when the client relationship has ceased. However, we regularly receive information from the FCA on the authorisation of firms that allows us to proactively update our platform records. Our call centre staff also check customer records over the phone.
“When a client is identified as non-advised, we write to them setting out the benefits of having a financial adviser and outlining how Old Mutual Wealth will support them while they are not taking advice.
“We ensure the client receives appropriate services to enable them to manage their investments via our online customer centre. This service allows customers to top up their accounts into their existing fund choice, open a new Isa or collective investment account, switch funds and make withdrawals.
“The ongoing platform charge remains the same for client regardless of whether they are taking advice.”
Mugridge, however, said Quilter hasn’t “experienced a particularly large spike in non-advised client numbers in recent years”.
‘Much more could be done’
Bruce Davies, director and head of pensions & retail investments at Alpha FMC, said: “It is clear that the number of orphaned clients is growing, and the regulator has committed to conducting further analysis in areas where they may have concerns over an inadequate response from individual firms.
“Our study shows that platforms are generally taking a reactive approach, rather than proactively identifying and seeking a solution for orphan clients. On the whole, it appears that much more could be done to ensure that no clients are negatively impacted by being orphaned.
“As the industry continues to evolve, and adviser platforms start to deliver improved capabilities and experiences, the benefits will be felt by the end-customer. This not only helps the relationship between the platform and adviser, but also that between adviser and client.
“The research shows there is an opportunity for platforms to readily engage with advisers’ orphaned clients and ultimately, if required, be able to satisfy the regulator that they have been acting in the best interests of the client.
“To make real progress, platforms should consider increasing their use of data and analytics to better identify orphans and ensure full oversight of this group of investors. Platforms should also think about how to proactively engage with their adviser communities to reduce the risk that orphan clients go unnoticed.”