The Financial Conduct Authority (FCA) have just published an interim report on their study of “investment platforms”. It makes for very interesting reading. That is particularly so after the revelations from Hardman last week. They reported that the revenue per assets held on the platform from Hargreaves Lansdown (HL) was more than twice that of soon to be listed AJ Bell Youinvest. HL is the gorilla in the direct to consumer platform market with about 40% market share. HL earns £473 per £100,000 invested while Youinvest earns only £209.
That surely suggests that competition is weak in this market. Indeed the FCA report highlights that investors not only have difficulty comparing the charges of different platforms, but they do not seem too concerned about high charges as they focus more on other aspects of the service provided. It also says on page 23 of the report: “Our qualitative research also found that consumer satisfaction levels are sometimes linked to satisfaction with overall investment returns, which tend to be attributed to the performance of the platform. This suggests some confusion about consumers’ understanding about platforms’ administrative function as opposed to the performance of investment products. So it is possible that consumers’ relatively high satisfaction levels with platforms could be influenced by the positive performance of financial markets in recent years”. In other words, the consumers of such services are very complacent about the costs they pay at present.
Another piece of evidence that this is not a competitive market obtained by the FCA was that they found that when platforms increased or decreased prices it had no significant impact on flows in and out of the platform. No doubt some platform operators will read that with joy, but others despair!
Indeed when I made some comments on Citywire effectively saying I thought it suspicious that there were so many positive comments about Hargreaves Lansdown in response to an article reviewing the Hardman news, particularly as they were clearly much more expensive than other platforms who provided similar effective services (I use multiple ones) I was bombarded with comments from lovers of the HL service. Bearing in mind that platform charges can have a major impact on overall returns in the long term from stock market investments, you would think investors would pay more attention to what they are being charged.
One particular problem is that switching platforms is not only difficult and a lengthy process but can also incur charges. This is clearly anti-competitive behaviour which has been present for some years and despite complaints has not significantly improved.
The FCA summarises its findings as:
- Switching between platforms can be difficult. Consumers who would benefit from switching can find it difficult to do so.
- Shopping around can be difficult. Consumers who are price sensitive can find it difficult to shop around and choose a lower-cost platform.
- The risks and expected returns of model portfolios with similar risk labels are unclear.
- Consumers may be missing out by holding too much cash.
- So-called “orphan clients” who were previously advised but no longer have any relationship with a financial adviser face higher charges and lower service.
That’s a good analysis of the issues. The FCA has proposed some remedies but no specific action on improving cost comparability and the proposals on improving transfer times are also quite weak although they are threatening to ban exit charges. That would certainly be a good step in the right direction. Note that a lot of the problems in transfers stem from in-specie transfers of holdings in funds and shares held in nominee accounts. Because there is no simple registration system for share and fund holdings, this complicates the transfer process enormously.
One interesting comment from the AIC on the FCA report was that it did not examine the relative performance of different investment managers, i.e. suggesting that lower cost investment trusts that they represent might be subject to prejudice by platforms. They suggest the FCA should look at that issue when looking at the competitiveness of this market.
In summary, I suggest the platform operators will be pleased with the FCA report as they have got off relatively lightly. Despite the fact that the report makes it obvious that it is a deeply uncompetitive market as regards price or even other aspects, no very firm action is proposed. But informed investors can no doubt finesse their way through the complexities of the pricing structure and service levels of different platform operators. I can only encourage you to do so and if an operator increases their charges to your disadvantage then MOVE!
The FCA Report is present here: https://www.fca.org.uk/publication/market-studies/ms17-1-2.pdf
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
I agree with this. The FCA should not pull its punches here – particularly with barriers to switching and in specie transfers. All transfers should have a max time limit and be free of charge if we are to encourage more dynamism in the market for broker services.
I also noted an interesting comment in the FT on the matter of broker competitiveness with regards to dealing prices. The correspondent suggested that a broker should be forced to offer both sell and buy prices blind – ie, BEFORE they know which of these transactions the client wishes to do. I presume this is to remove any suspicion of manipulation? The correspondent suggests this is necessary because the broker can sometimes deal as agent and at other times as principal to fulfill an order.
I am not expert in this area but have often found myself wondering whether I am being offered the best possible deal as I press the button. Does the FCA cover this area in its review? What views do people have on this?
HL have a fairly low flat fee for shares and reasonable dealing charges. The main issue is the percentage fee for unit trusts and oeics, which are probably used mainly by relatively unsophisticated investors who are less likely to shop around. It’s hard to see any justification for percentage fees, but as far as I know Alliance Trust is the only major platform with a flat fee and presumably they haven’t been overwhelmed with transfers. Probably general education about the effect of charges is the best help, I suspect most people just don’t appreciate that 0.45% pa is a big deal if you compound it over decades.
I agree that HL’s percentage fee for holding OEICs and UTs is entirely indefensible and somewhat sneaky. There are other brokers who charge a flat fee per account rather than percentage fee on all holdings – Interactive Investors comes to mind but I’m sure there are others. When you think about it the percentage fee doesn’t really make any sense as the platform costs are almost entirely fixed and independent of a client’s number or size of holdings.
It’s a relic of the commission system. Funds all charge percentage fees, which is a whole other issue, so that’s how the commission was paid and the brokers built their business model around it, so when commission was abolished they just replicated it as an explicit charge. Probably the brokers with flat fees are the ones who don’t have a significant legacy unit trust business, e.g. ATS was built for investment trusts. In fact the way ATS developed means that its charging structure probably gives a good idea of what it actually costs a broker to do different things, i.e. there’s a lot less cross-subsidy than you get with most providers. Of course as an HL client with almost entirely shares and ITs I’m one of the ones being subsidised by all those clients with oeics, so maybe I should keep quiet …