How will platforms facilitate adviser charges when cash shortfalls occur?

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Advisers are being warned to consider how their cash flow and investment advice will be impacted by the different ways platforms cover shortfalls when paying adviser charges.

Fundweb’s sister publication Money Marketing has spoken to 11 platforms to assess how they will pay adviser charges in the event there is insufficient money in the client’s cash account.

Most platforms employ a process of selling down assets to cover the adviser charge, known as “auto-disinvestment”. This happens automatically when there is not enough money in the client’s cash account to cover adviser or platform charges.

Platforms employ a range of different approaches to auto-disinvestment, including deducting the adviser charge from the largest fund on the platform, as a proportion of all funds held, or from the least volatile fund. Platforms generally have a default process in place to use if the adviser has not given specific instructions for a shortfall, while some offer the option to pre-select a particlar approach.

Skandia, Cofunds and Fidelity FundsNetwork take charges from the client’s largest fund as the default option.

FundsNetwork deputy head Paul Richards says: “The decision to take the fee from the largest fund was made to reduce significant complexity and cut the number of transactions associated with proportionate deductions.”

Richards expects most advisers to choose to have fees paid by unit deduction directly from the nominated funds, bypassing the cash account altogether.

Axa Elevate, Ascentric and Transact sell down assets based on a “last in, first out” basis, where the last units bought are the first to be sold to cover the adviser charge.

Nucleus, Novia and Aviva deduct the charge proportionately across the funds held.

Aviva UK senior marketing manager Phil Ralli says: “We did look at going to the last invested fund to disinvest, but we steered away from it. There will be very good reasons why the adviser and the client made a decision to invest in a specific fund, which could be timed to reflect what is happening in the market. We felt taking all of the money from that last invested fund was a bit counter-intuitive and would probably disturb the plans the adviser and client have put in place.”

Of the platforms Money Marketing spoke to, only Standard Life offers no auto-disinvestment facility. If there is a shortfall in the cash account, the adviser charge is not paid. Standard says is approacht encourages advisers to ensure there is enough in the cash account to fund adviser charges.

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Standard Life’s Graeme Bold

Standard Life director of UK retail RDR Graeme Bold says: “We believe our approach gives advisers greater control, but we appreciate some platforms offer auto-disinvestment. We have spoken to many advisers on the subject and while many are happy with our ‘keeping cash healthy’ approach, other would like the more standardised process that comes with auto-disinvestment. We will be reassessing our position with advisers in the new year to understand if there is a viable way to amend our process.”

The Lang Cat principal Mark Polson says auto-disinvestment may not suit all advisers given potential capital gains tax issues and the fact that deductions may not reflect market conditions.

Bu the says: “I feel it is better to have a fail-safe so if there is not enough money then assets are sold down to meet the fees and the adviser gets paid. But when that happens a trigger note should come out to the adviser and the client saying what has happened.”

He warns where auto-disinvestment is not in place and an adviser without discretionary permissions tells the platform which assets to sell down, that adviser will have acted outside his or her regulatory permissions.

Polson says it is important for advisers to consider how their platform will cover the adviser charge where there are insufficient funds, to ensure the platform is right for their business.

He says: “You can guarantee the time when the problems will happen is when you have already set up on the platform. If at the stage where money is being transferred things start falling down then it becomes an issue which could turn advisers off what would have been a very reasonable platform in all other respects.

“Advisers need to make sure they understand what the platform does and be ready for it. It is really important because it all comes down to cash flow and income, and on platforms this is an absolutely key part of the process.”

Novia's Bill Vasilieff
Novia’s Bill Vasilieff

Novia chief executive Bill Vasilieff says: “I suspect advisers have not looked at this in any level of detail. In the past, we very rarely, if at all, had to sell down assets, as there was always enough money in the cash facility. But with the RDR coming up and advisers having to think where they are going to take the adviser charge from, advisers will need to take a much closer look at this. It is quite a big issue, and some advisers have not realised that yet.”

Hudson Green & Associates principal Ian Green: “It should be up to the client how they choose to pay their adviser. Advisers that have not taken this into account when they are choosing the platform could be in for a rude awakening.”

How platforms will cover charges where there is a cash shortfall:

  • Fidelity FundsNetwork: Adviser charge will be deducted from a fund nominated by the adviser. If there is not enough in the nominated fund or no fund has been chosen, adviser charges will be deducted from the largest fund.
  • Skandia: Advisers can choose to take their adviser charge from the cash holding, across the funds, or from a specific fund. If there is not enough money, the charge will be taken from the largest fund.
  • Cofunds: Advisers choose whether the charge is taken from the largest fund, a nominated fund or if it is linked to a model portfolio, the charge will follow the model portfolio sell-down process. If no instruction has been given, the charge will be deducted from the largest commission-free share class fund.
  • Standard Life: No auto-disinvestment facility is offered, so if there is a shortfall the charge will not be paid. Advisers are encouraged to ensure there is enough money in the cash account to pay adviser charges.
  • Axa Elevate: Advisers can choose whether to sell down either the least volatile fund or on a “last in, first out” basis, where the last units purchased in any fund are the first sold. Advisers can also ringfence investments so they are not auto-disinvested.
  • Nucleus: Nucleus recommends clients maintain a balance of two per cent in their cash account to cover platform and adviser charges. If there is not enough money the adviser charge is deducted proportionately across standard assets.
  • Novia: Adviser charges will be taken proportionately across a client’s assets where there isn’t enough cash available.
  • Ascentric: At least 1 per cent of assets held in each wrapper need to be held in cash to meet platform and adviser charges, subject to a minimum of £50 per wrapper and a maximum of £1,000.
  • If there is a shortfall, Ascentric will sell down the most recently added investments in the GIA or other wrapper to cover charges for the next three months.
  • Transact: Advisers can choose a nominated fund to deduct the charge from, and failing that Transact will sell down on a last-in, first-out basis.
  • Aviva: The adviser charge will be taken from across the funds proportionately in line with how funds are invested. Investments in commercial property through a Sipp and direct equities cannot be auto-disinvested.
  • Zurich: Will offer auto-disinvestment, but the details are yet to be announced.