Investors using so-called ‘fund supermarkets’ are finding that there is a good level of competition within this market, according to the interim findings of the Financial Conduct Authority’s (FCA) investment platforms market study.
But the financial regulator has voiced concerns that the rapid growth of investment platforms – the market has doubled in size since 2013 and has £500 billion of assets under management – means that consumers can lose out when they want to switch platforms.
With 2.2 million customer accounts opened in the past five years, the regulator wants to ensure investors are not deterred from switching accounts because of a lack of transparency about fees. It found that around 7% of all consumers tried to switch but failed to do so. It also found that “significant” barriers to switching could limit the pressure on platforms to provide continued value for money.
The report highlights the fact that customers using direct-to-consumer (D2C) platforms found it difficult to compare prices and that fees were hard to understand.
It also points out that customers using model portfolios face problems comparing products, with investors potentially being mistaken about what risks and returns they face when presented with similar sounding labels such as ‘cautious’, ‘conservative’ or ‘balanced’.
Finally, the FCA says that customers with large cash balances may be missing out on investment returns and that ‘orphan clients’ – customers who were previously advised but no longer have any relationship with a financial adviser – are limited in their ability to alter their investments on an adviser platform, so are paying fees but not receiving a fully functional service.
The FCA wants to introduce measures so that platforms do more to ensure competition between asset managers, making it easier for investors and advisers to switch platforms and tackling price discrimination between orphan and existing clients. It also wants to introduce measures to alert customers who are holding large cash balances.
‘One of the biggest issues is lack of pricing transparency’
Commenting on the FCA’s findings, Richard Wilson, chief executive of Interactive Investor (Moneywise’s parent company), says: “One of the biggest issues is in the industry is lack of transparency in pricing. All the research says that basis points pricing [where firms set the price of goods based on a base cost, plus transportation costs] is confusing and investors find pounds and pence easier to understand. Our pricing is a flat fee in pounds and pence.”
Mr Wilson continues: “The ability of investors to switch between providers is an essential part of a fair and competitive industry. There is a risk of significant detriment to customers arising where firms offer tempting incentives for customers to switch, but then tie customers in unfairly with exit fees or minimum holding periods. We are pleased that a key focus of the review has been this clarity and fairness in the genuine, long-term interest of consumers.”
Steven Cameron, pensions director at pension provider Aegon, adds: “As in most areas of financial services, advisers play a key role in supporting customer decision marking and we welcome the distinction between advised and D2C platforms and the remedies under consideration for each.
“Model portfolios are an alternative to multi-asset funds and can offer customers an improved investment solution. We support FCA aims to make sure customers can understand and compare the risk profiles within these and that charge disclosures are clear and comparable.
“The FCA’s concerns that customers, particularly on D2C platforms, may be holding excessive amounts in cash, and therefore missing out on investment returns, mirror similar concerns for drawdown customers highlighted in the Retirement Outcomes Review.”
However, Mr Cameron points out platforms are limited in their ability to influence fund managers.
He says: “While the report continues to look at how platforms can exert competition pressure on asset managers, it fails to recognise that ‘open’ platforms have less negotiating power with fund managers than those which limit the funds on offer or which influence customers towards particular funds.”
The FCA is seeking feedback on its initial findings by 21 September 2018 and its final report about the market is due in early 2019.