Guide to Platforms
A platform is a generic term favoured by the FSA to describe two similar service propositions, fund supermarkets and wraps.
Platforms are described by the FSA as: 'Internet based services used by intermediaries (and sometimes clients) to view and administer investments. They tend to offer a range of tools which allow advisers to see and analyse a client's overall portfolio, and to choose products for them.
As well as arranging transactions, platforms generally arrange custody for clients' assets'. Fund supermarkets and wraps do have a lot in common but there are currently some crucial differences, which will be explained below.
Fund supermarkets
Fund supermarkets were originally designed as basic trading platforms providing access to a wide range of mutual funds. The number of funds available is determined by the fund manager's willingness to pay for inclusion on the platform, by rebating a proportion of their annual management charge (AMC) back to the platform operator. This methodology means that there is no implicit charge for either client or adviser for use of the platform. Indeed, the fund manager not only pays the platform provider but he also pays the adviser (trail commission). A typical breakdown of a fund AMC of 1.5% would be: o 0.25% (on average) to the platform o 0.5% to the adviser o 0.75% to the fund management company Because inclusion on the fund supermarket is dependent on the fund managers willingness or ability to pay, the range of funds available is not going to be 'whole of market'. Some fund mangers simply do not want their funds distributed through the fund supermarkets while others simply cannot afford to share their fees. The fund supermarket charging model does not lend itself to trading in investment vehicles whose charging structures will not allow management fee sharing, such as investment trusts and exchange traded funds (ETFs). The first fund supermarkets were really designed only for trading funds and the only tax wrapper that was available was an ISA. As they have developed, they have begun to include other tax wrappers such as pensions and unit linked bonds, usually provided by third parties.
Wrap platforms
The wrap platforms are in some respects a natural extension to the services offered by the fund supermarkets. Their charging model means that they can facilitate trading in a whole of market fashion. Use of the platform is charged directly to the client, which means that funds and other investment vehicles are not excluded from selection simply because of their own charging structure. Not only is the whole market of unit trusts and open ended investment companies (OEICs) opened to selection but so too are other investment vehicles not available on fund supermarket platforms. To offset some of the platform charge to clients and to remain competitive with the fund supermarkets, favourable terms are still negotiated with as many fund managers as possible. They agree to rebate some of their charge back to the wrap client account. It is out of this account that platform charges and adviser fees (trail) are collected. The typical split of a fund manager's AMC of 1.5% on a wrap platform would be: o 0.75% rebated to client account (this offsets platform charge and adviser charge) o 0.75% retained by fund management company
Platform development
The biggest fund supermarkets have for some years claimed that they are developing into wraps, so in some respects the edges have been blurred around the definitions and the services offered. However, two main differences remain in that for wrap platforms the client pays the platform charges, whereas for the fund supermarkets the fund managers pay the platform charges. Secondly, wraps are in the main whole of market in terms of investment availability, whereas fund supermarkets, although having an extensive range of funds to choose from, are not whole of market. The outcome of the FSA's platform discussion paper published at the end of March may change both these positions. At the end of 2004, when Defaqto first started formally researching the IFA platform market, there were nine propositions in the market. Of those two have merged (Skandia and Selestia, becoming Skandia Investment Solutions). One has dropped out of the market (American Express). One has been sold on and its future is in doubt (James Hay wrap, formerly Abbey wrap) and one has closed to new business and has subsequently been re-launched to the market (Aviva wrap, formerly Lifetime wrap). It is clear from this that running a platform has not been a guarantee of success and profitability, yet more and more organisations continue to pitch for business in the IFA market. Views are mixed as to whether or not the retail market will support so many platform operators as the road to profitability is a long one, and the shareholders of companies that operate a platform may not have the patience for the long haul.
The current market
The platforms that are currently being monitored and analysed by Defaqto are:
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Axa Elevate
Ascentric Wrap
Avalon Freedom
Aviva Wrap
Cofunds
FundsNetwork
Macquarie Wrap
Novia Wealth Management Services
Nucleus
Raymond James Adviser Service
Transact
7IM Platform
Skandia Investment Solutions
Standard Life Wrap
Standard Life FundZone
Wealthtime Private Client Services
Wealthtime Light
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Wrap
Wrap
Wrap
Wrap
Fund Supermarket
Fund Supermarket
Wrap
Wrap
Wrap
Wrap
Wrap
Wrap
Fund Supermarket
Wrap
Fund Supermarket
Wrap
Wrap
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Table 1 - IFA platforms analysed by Defaqto
Source: Defaqto
Further research on Platforms is now available from Defaqto's Official Intermediary Guides & Product Reviews. Click here to visit the Intermediary Guides at Defaqto Adviser