So that’s it. RDR versions 1 and 2 have now been implemented.
So what now? Are we about to see a ‘big bang’ transformation platform market spurred on by the professionalised advice sector? Will platforms kick the rebate habit and bulk convert bundled funds to clean equivalents? Sadly, in the short term I think not. The longer term, however, looks rather more interesting.
So, should advisers be worried about the 2016 sunset clause or is this just a platform provider ‘thing’?
Like the FCA’s original RDR legacy business rules, the devil’s in the detail. Advisers now have to consider how they are planning to deal with the complexity that will arise from having clients remaining invested in bundled funds. And the complexity becomes greater the longer the move to clean is delayed.
This was a major influence on our decision to move decisively to clean for all client funds through a platform-led bulk conversion. By taking the lead, advisers were spared the work.
We are already seeing many platforms will introduce new and more extensive ‘trigger events’, with everything from a switch to an increased regular investment mandating movement into a fully unbundled model and switching off trail commission.
Advisers are also discovering the complexity of rebalancing, performance reporting and deciding which share classes to target for withdrawals within mixed share-class portfolios.
The impact of having to accept rebates as units rather than cash for new business adds further complexity and potential for confusion, as does different platforms choosing to credit these rebates to near-cash funds, the source fund, or somewhere else altogether. Let’s not even mention de-minimis cash rebates may still be paid and that, despite all this effort, the rebate may still be subject to income tax.
The bottom line is the old adage ‘failing to plan means planning to fail’. What matters for your business and clients is that there is a clearly documented approach from the platform that you can operate around.
Having understood the many and varied ways platforms are handling these challenges), you’ll need to consider what an orderly escape to the unbundled world looks like for your clients ahead of 2016. Having a plan, will be a must to drive consistent client treatment.
If you choose to let nature run its course, any remaining trail commission will naturally run down as trigger events are reached. However, platforms are under pressure to adopt a 100% rebate-free model, so also expect forced switches and conversions ahead of 2016.. Therefore, a wholesale move to adviser charging will be essential sooner or later – the priority must be for the advisers to control and schedule this appropriately.
Many advisers are planning to take a more proactive approach to get to clean as soon as possible. However, weighing up different platform charging models, OCFs, AMCs, TERs, taxable and non-taxable rebates, fund discounts, transparency and choice, to ensure the move is right for a client will require considerable analysis. On top of this there is the operational requirement to actually instruct the conversion or, on some platforms, switch yourself (which means factoring in a period out of the market in your analysis).
This was a major influence on our decision to move decisively to clean for all client funds through a platform-led bulk conversion. By taking the lead, advisers were spared the work. The responsibility for being able to demonstrate that customers were treated fairly sits with Standard Life.
The combination of our new simplified pricing structure, the wide range of discounted clean fund deals and the undoubted benefit of transparency driving freedom of choice made it beneficial for customers to move clean on our platform – factors that still apply now. Though judging the customer outcome cannot just be a ‘point in time’ cost comparison.
This brings me onto another market dynamic that some platforms seem to have missed.
In passing on cost, risk and complexity to their advisers, platforms are relying on inertia to retain their assets. We are, however, beginning to see a rise in asset re-registration activity. This is in part driven by advisers who have worked out that perhaps the most efficient way to move decisively to clean is by moving their book onto a platform that is already operating on a clean basis.
The very process of re-registration to these platforms will automatically convert the funds to their clean (and discounted clean) equivalents and, in terms of customer benefits, this allows the adviser to take a longer term strategic view.
The platform rules will not change the world overnight, but they illustrate a major long-term challenge to platforms’ strategies. The profound nature of the changes required to some platforms’ underlying business models means the decisions they’ve made in the last 6 months will have an enormous impact on where they will be in 2 or even 5 years’ time.
For example, have some platforms permanently increased their ongoing development and maintenance as a result of creating new legacy complexity in their model? What does this mean for their ability to invest and pace of development?
Where legacy exists, to what extent is it cross-subsidising new business? If their new charging structure is cheaper than their legacy charging structure now, how sustainable is this?
Some platforms still retain rebate revenues. What is the impact on their commercial model as more clients move into the unbundled world and margins from rebates are eroded?
Given the over-supply in the market, consolidation of one sort or another is very likely. In a loss-making market where substantial ongoing investment remains a key requirement, cutting fees is a desperate act. Given the low correlation between pricing and flows in the platform market, betting on achieving sufficient additional flows to make up lost revenues (and allow for additional investment to upgrade the proposition) is a mighty risk.
Some platforms strategic decisions have given advisers a strong justification for moving assets. The decisions advisers make now will determine the winners and losers of the platform market.
As a minimum it would appear to be prudent for advisers to have contingency plans to move assets when the time comes. If ever there was a reason for advisers to demand better automation of re-registration, this is it.