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He who pays the piper…..

Jan 09, 2013 7 Comments by
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I have been thinking about something for ages, and I reckon it is time to consider turning an accepted norm on its head and do things differently….

Before outlining exactly WHAT I have been thinking about, let me draw up some scenarios for you to ponder and see how they would make you feel:

  • Solicitor completes the purchase of your new home, and hands you a separate bill to pay for his secretary’s time.
  • Restaurant provides lovely meal but the bill includes separate invoices from the butcher and grocer for the ingredients that you have to settle yourself.
  • Airline delivers you to your destination, and then asks you to settle the fuel bill directly with the provider.

There would be no real hardship in these scenarios, as the net cost is the same, but you’d be a bit peeved if it happened because you have signed up to a service with one company (or so you thought).

The point I am (rather laboriously) trying to make is that it would be in advisers best interests to pay the platform fee instead of the client.

Ultimately, who benefits from the platform?

That’s obvious….the adviser.  The client doesn’t really benefit other than in the ability to have a joined up service from the adviser at a realistic cost.

But that is the SERVICE they are signing up to, not the platform.

When platforms first came about, the idea of housing everything together and managing it all from a single account was really exciting – a chance to change the public’s perception of how to plan for their future and make them realise we are not pension salesmen.

Let’s assume I haven’t thought about this fully and maybe we could use this as an opportunity to open debate.

I’ll give you a few advantages and disadvantages of the adviser paying the platform fee and maybe you could add your own to the comments and let’s see where the net position gets us in a few months:

ADVANTAGES:

  • No-one is worse off

The client currently pays anywhere between 0.25% and 0.6% for the platform (quite often not really realising it).  When the adviser pays the charge, they increase their fees accordingly so the client has the same net position.

  • The adviser controls the terms of the platform and influences positive developments

If the client pays the fee, they don’t realise their collective negotiating strength they have with the platform and often may not know HOW to influence developments.  Advisers, on the other hand know how a platform should develop and by being the fee payer can influence the direction taken with more power to their elbow.

There is also the client’s perception.  At the moment, the ultimate sanction the adviser has with a platform for poor service is taking their clients elsewhere.  In reality, that is not going to happen though, particularly as you have to go back to the client and say ‘you know that funky platform I recommended, well – we need to change to this one now’.

  • The client is REALLY buying the service not a product

The RDR was all about the move to proving professionalism and charging directly for the service provided.  If the client is paying the platform fee, it is just another product being sold.  If, on the other hand the adviser is paying it, it is a tool they are using to deliver the service.

  • The cost of the platform is a deductible expense

Bit tenuous, maybe, but nonetheless this could help larger businesses

  • Create true partnerships

If the adviser is paying the fee to the platform, they can ensure they work with a platform that truly demonstrates an appropriate model for the service proposition they have developed for the appropriate client segment.  Also, it would remove the fear some advisers still have that the platform will, one day, run off with all of their clients as THEY are the client.

  • Consolidate software use

Could paying to have the platform also mean you could do away with the need for a separate back office system (the only thing they did in the past that the platform couldn’t was reconcile commissions anyway, wasn’t it?)

DISADVANTAGES: 

  • Comparing like with like

If a client is comparing the adviser fees between those that pay the platform and those that don’t, they will need to understand this distinction

  • Practicalities

If we are going to do this, we really ALL need to do it or it’s not really going to work.  Also, can it even be done from a regulatory perspective?  Would it be considered an inappropriate incentive by the FSA/FCA?

  • The current risk based charges would need to change

Instead of basis points charges we would need know software licence charges (The only reason we accept the basis points charges is because we are not paying the fee – do you pay your back office software on basis points?)

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About the author

Director of The Timebank, providing Paraplanning support to advisers for over a decade.

7 Responses to “He who pays the piper…..”

  1. Alan Dick says:

    Well said Damien. I have been banging on about this as being the logical model for some time. The only problem is that the current basis points platform costs will need to be replaced to allow the platforms to remain viable. Therefore, the fixed software license fee is likely to be quite high which could make it only viable for large firms. Only time will tell but I would love to see it happen.

  2. Phil Young says:

    My initial reaction was that it would be difficult for a firm, especially an independent firm, to extract themselves from the relationship, particularily if their new platform had higher charges They might not want to go back to the client with a fee increase if it is perceived as ‘their’ fee. But I guess this pretty much happens anyway and there’s nothing to prevent use of more than one platform in this way.

  3. Mark Polson says:

    Yes yes yes. Great post Damian. At their heart what adviser platforms do is enable advisers to give better service, advice and (hopefully) investment outcomes by bringing what’s technically known as Stuff together. The client benefits from the adviser being able to offer a better service, in time hopefully at a price that reflects slicker admin. None of that sounds like basis points of your portfolio. This is surely a model someone mainstream is going to offer soon. I really hope when they do that some advisers will give it a crack. It’s the natural evolution of adviser platforms and of RDR in my view. When the adviser is the customer, all kinds of power shifts happen and many if not most of them will be for the better.

  4. Dave McGovern says:

    Firstly great post Damian. Reading the other blogs its the question the industry doesn’t really want to have. Two clear points to discuss

    1. Who pays
    2. What they pay £ or bps

    First who pays, guys above are right lots of practical issues, and you raise some yourself. I suspect the regulator would he happy though. Infact unbundling I suggest is stage 1, the may be a stage 2 where the regulator looks at who gets the value., As a client of the profession what I want is one price for the services, I them view it as fair value or not. The regulator may not admit this, but disclosure doesn’t work, more detailed disclosure definitely won’t work.

    I would expect in the price i pay some operating costs for the adviser, I’d expect to pay for that one way or another, how I pay it and how it’s disclosed for me isn’t an issue. The absolute cost might be. Sadly I don’t think the regulator buys that and what’s us to understand the cost of all individually. Your examples above illustrate how other professions don’t need to do this, because it doesn’t add value

    So onto point 2. When you buy your house is it a flat fee or % charge we pay? When I get advice is is it a flat charge or %?

    I guess on last point it varies, but still dominate model is % or as the industry calls it bps( just for added confusion).

    Is the work different for selling a £1m house to a 150k house? Actually probably easier to sell the 1m, yet we pay more, it’s the norm, in behavioural finance it might be called anchoring, you allude to it at start of post. It’s hard to change.

    Now multiple that difficulty tenfold or more. As you say all the profession would need to do it, then get all the industry to agree.

    Phil asked the question on twitter is this madness, pointless or likely long term outcome? Well, if I was still gainfully employed in industry I’m sure I’d be saying its madness and pointless. Truth is, it’s a debate that needs to be had, I think the first point about advisers paying for the service may well happen, but only through regulation, and with that careful what you wish for. I just don’t see the second point around flat fee happening, least not in next 10 years. It’s not happened in other markets more mature than uk yet. What will happen though is price will come down, but comparing apples and apples will get harder as the industry comes up with ways to maintain margin.

    We should knock it though, we all do it – as per marks blog, just make sure as a profession you are clear what the industry is giving you.

  5. Damian Davies says:

    With the adviser paying for the platfrom, the fee they charge is for the service they deliver. They won’t be ‘passing on’ the cost.

    You expect to pay more for a great service and get no frills at budget suppliers. The adviser has to decide what their market is and use an appropriate platform for that ‘proposition’ maybe?

  6. Phil Young says:

    Like the sentiment. There are lots of boring practical issues to think about but I don’t think that should necessarily stop the discussion about whether this is something advisers want in principle. I guess the first concern is that it gives the opportunity to hide where costs are coming from which could result in ‘ a form of price fixing’ with charges levelled up rather than driven down if there is the opportunity to keep margin. Would it make the adviser behave more like the agent of the platform rather than the client if they are ding the billing for it? Would the client want compensation from the adviser rather than the platform for a platform’s errors?

  7. Abraham Okusanya says:

    A very thoughtful post. I do share most of your sentiments. However, some vertically integrated models might claim they are already doing this, albeit still charging the client separatelyseparately. Also platforms would claim that they provide some services directly to the end client, so who pays for that?

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