Written by Ben Hammond on Wednesday 23 March 2016
I’ve just finished watching ‘Dickensian’ on the Beeb and spent most of the series slowly ticking off the characters I was expecting to see: Scrooge, check; Fagin, check; Miss Havisham, check; Tiny Tim Cratchit, check…but wait a minute, what’s happened to Oliver? He got left almost to the end, but finally the orphan popped up to be counted (and ask for more, please).
In the world of financial services, orphans (customers who are cut loose from an adviser or platform) also seem to be drawing the short straw when it comes to their relationship with whoever it was who sold them their investment products in the first place, their very own Mr or Mrs Bumble in Dickens’ world.
Advisors, platforms and fund managers have all been busy working out how to make profit in the new world of zero commission, once the FCA’s Sunset Clause expires on 6th April. But many of their customers will still not fully understand what the changes brought about by PS13/1 are and how they will be affected. The FCA (Inspector Bucket, if you will) is on the case looking closely at customer value and investment suitability itself and some careful decisions have had to be made.
All parties will be feeling the pinch, in particular if they aren’t already managing their business in a purely unbundled fashion. Inspector Bucket will want to see that customers have been or are getting value for the 25bps or 50bps their platform or adviser is taking from the fund manager. However, many customers have not realised until recently that the advice and service they were getting wasn’t free so this could be a hard sell.
According to Nucleus, the Sunset Clause has the potential to halve an advisor’s profits. Some are taking the moral high ground and offering bulk switching to clean asset classes and at the same time persuading the customer there is real value in paying for advice. Inevitably, an advisor’s shiny new proposition will not suit all of their legacy clients so some decision making is needed when deciding which customers to concentrate. It looks like banks are getting in on the action as well with Santander launching a new platform and Nationwide considering how to offer a better service to its direct and advised customers.
When it comes to platforms, income from fund managers is about to come to a sudden halt and it’s unlikely that any will be willing to offer their services for free, so what happens then? The fund supermarkets, Fidelity Funds Network, Cofunds and Old Mutual as the three biggest, still had billions of pounds left to address at the last count, with anything up to 25% left to convert. Some of these platforms report low levels of orphaned clients, with Cofunds quoting 0.1 per cent at the end of 2015 but Aviva higher at 1%. Perhaps a sign that advisors are giving customers what they want, but numbers that can only have increased in the lead up to 6th April.
Fund managers are also starting to feel the pain with some taking the plunge and launching their own platform service or buying up firms with a ready-made solution to offer their legacy customers. The big question is why should a customer pay 150bps from within their fund when they can pay 75bps plus a platform charge at perhaps 40bps? As a consequence, some are considering simply slashing their charges to remain attractive to customers.
So far, 2016 seems to have been relatively quiet when it comes to Sunset. Maybe everyone’s ready for what’s coming next month (I’m sceptical), maybe there are more interesting things to think about (Pension ISAs, FMAR, The Return of Commission), or maybe some are just ignoring the situation and hoping that it’ll turn out alright in the end!
This article first appeared in Professional Adviser 23/03/2016
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