Last week I wrote nice things about Fidelity and their transparent disclosure of fund manager rebates. This week I find myself back wrestling opacity again, and it reminds me how difficult it is to perform meaningful comparisons between old and new world.
To many people outside the platformerati (you’re welcome) with highly-evolved scepticism, platforms are just a way of ladling on another layer of charges – and if you look at platforms that offer a wide range of external tax wrappers then this does seem to be the case. They also, arguably, offer considerably more benefit to the adviser than the client.
So letÃ¢ÂÂs ask the question. Are platforms more expensive than packaged products? Are clients ponying up for something that does nothing for them but makes their adviserÃ¢ÂÂs life easier? WeÃ¢ÂÂre right to ask this just now, as the recent FSA RDR platform paper has also brought it up:
Ã¢ÂÂThe adviser needs to take into account whether being on a platform is in each individual clientÃ¢ÂÂs best interests and ensure any personal recommendation to invest via a platform is suitable. It is important to stress that this will not always be the case. If being on the platform gives the client a materially worse outcome than being off it, (for example, the costs are significantly higher on the platform), the adviser should clearly not be recommending using a platform for that client.Ã¢ÂÂ
FSA PS11/9 Ã¢ÂÂ Platforms: Delivering the RDR and other issues for platforms and nominee-related services, pp.13-14
So I set out to do a bunch of cost comparisons between platforms and insured products. And do you know what? I can’t do it. Now, I’ve built and marketed unbundled, bundled, packaged and insured products. I know how they work. I know where the money flows, how it’s made and lost. And I can’t produce a meaningful comparison.
Why? Because the figures shown on an insured product illustration only bear a tangential relationship to what the client pays. Most of the manufacturing margin is not made from the product (any actuaries who want to challenge this, let’s see your maths) but instead from the way insured funds are managed.
Packaged products look cheaper – not always but sometimes – than platforms. Yet their profit signature is between 3x and 7x better than transparent, unbundled business. Some of that is down to accounting; some of it is down to scale. But (I’ll wager) the better part of it is because insured products are full of clever margin-takes that customers could never be expected to work out – and IFAs would need to be highly motivated to find too.
When I speak with providers and advisers who are trying to calibrate propositions for RDR, cost comparisons inevitably come into play. But to be honest, they’re pretty meaningless at this point. Only if RDR makes lifecos completely, and I do mean completely, break down and publish the revenue streams inside those products, will we be able to do a meaningful cost comparison.
For now, then, it has to be the proposition that looks right for a client, whether it’s on or off platform, is the one to go with. And cost comparisons can be no more than a secondary indicator of suitability. I think a few compliance departments might have to recalibrate a bit. All is not as it seems.