Platform pressure: Is adviser due diligence up to scratch?

Advisers’ platform due diligence has been put in the spotlight as concerns have been raised about whether segmentation policies are benefiting clients.

Last week, Fund Strategy reported exclusive data on how advisers select funds and carry out due diligence on the products they choose.

This week, our survey results reveal how advisers are picking platforms for clients, how often they conduct due diligence and what impact the RDR has had on advisers’ choice of platforms.

How much is enough?

In total, 228 advisers responded to our survey. Some 79 per cent were independent and 21 per cent were restricted.

Forty-two per cent of the advisers surveyed use three platforms, 16 per cent use two platforms, 14 per cent use four platforms, 12 per cent use one and 11 per cent use five or more. Just 5 per cent of respondents use no platforms at all for their clients’ investments.

The survey looked at advisers’ due diligence practices around platforms and how much time they spend conducting platform due diligence per client.

A total 11 respondents said they spent no time conducting platform due diligence, 32 said less than one hour, and 28 said they spend between one and two hours. Other respondents said they conduct due diligence per client segment rather than per client and others said it was difficult to quantify the time per client because due diligence is carried out through a centralised investment proposition on a company-wide basis or it is outsourced.

Several of those respondents specified that due diligence is conducted either every six months or annually.

The FCA does not specify whether platform due diligence needs to be done for each individual client or by client segment.

However, a factsheet from the regulator says firms might need to divide their clients into different groups if the platforms they are considering are not appropriate for all their clients.

The factsheet says developments in the market might mean an advice firm’s platform might not be the most appropriate option and they may need to carry out periodic reviews.

Independent consultant and former FCA technical director Rory Percival says the regulator considers client segmentation a “sensible approach” when determining which platform to use.

He says: “They don’t say you have to segment – this goes back to a discussion paper almost 10 years ago. The regulator talked about segmenting as a sensible way of looking at your client bank and then working out which platform to use on the back of that.”

Safety in segmentation?

While advisers are acting within the boundaries of regulation by conducting due diligence by client segment, they have come under criticism for the way they are grouping clients.

The Lang Cat principal Mark Polson says the majority of advisers are not segmenting their clients in a way that is in the customers’ best interest but are taking a firm-focused approach.

This is because, anecdotally, most segmentation occurs based on the value of a client’s assets, rather than their requirements.

Asked why advisers tend not to segment by need, Polson says: “It is more complex and it is more administration. Segmentation is hard work and it is boring and it doesn’t make you any money.”

Percival adds: “Advisers are more firm-focused. They think about, if we have got a client with £100,000, this is how much we will get from them each year if we charge this amount, what services can we provide for that?”

Percival says a more client-centric app-roach would be to segment clients based on the level of complexity of their investment needs or by the “life stage” they are at in the investment process.

Polson gives the example of advisers who segment clients with simple needs, for example, a basic Isa or investment requirement, will go on one platform and someone who needs discretionary management will go on another platform.

He says: “So long as you can group people together into a coherent segment and demonstrate the suitability of your choice for that segment, then it takes away the need to spend an hour per client working out what platform is best.”

Per client checks

However, Polson says due diligence by segment does not negate the need for a quick check per client to verify suitability.

He adds: “There must always be a mind at work; it can’t be mechanical.”

In a similar vein, Percival says the example he is giving firms is to group clients according to four stages: young accumulators who have relatively simple needs, those aged 45-55 who are serious about retirement, people who are approaching retirement or entering retirement, and those in full retirement.

He says: “If you have those categories it works better with what investment solutions you should be using.

“Young accumulators probably want a light-touch service but people at retirement will want a more complex investment solution and a more hands-on advisory service on an ongoing basis.

“It all fits together that much better and is more client-focused.”

Investment Quorum chief executive Lee Robertson says his firm now segments clients based on who is advised and who is discretionary.

He says: “We went through a big segmentation exercise years ago and we over-engineered it. Once we de-engineered it we did it based on who was adviser and who was discretionary. We are lucky that most of our clients are fairly homogenous and they tend to have the same kind of issues.”

Investment Quorum largely uses two platforms that give access to the whole market, including shares, investment trusts, exchange-traded funds, trackers and Oeics.

Robertson adds: “We don’t have a massively segmented client bank and I agree it is not all about asset size because sometimes clients with less assets have more complex issues than those with lots of assets. For us it is more about the service they are looking for from us as opposed to how much money they have with us.”

Getting the best deal

National advice firm Gale and Phillipson compliance officer Jon Dibble says clients are usually put on to its own discretionary fund management and platform sol- ution, but advisers can negotiate different arrangements based on an individual client’s needs to make sure it is suitable.

He says: “Our advisers are encouraged to engage with the senior team to make the fee proposition more commercially viable and attractive to clients who don’t meet the normal criteria.

“Typically, that’s a reduction in fees; 1 per cent is our maximum. We do encourage advisers to look at it on a case by case basis.”

Dibble adds: “We often get people saying we’ve got this situation, can we do something about the fees?  That’s typically a reduction where we see value in the client, or they’ve got other holdings we own.”

What advisers want from platforms

Advisers who took part in the survey were also asked what they think is important when choosing a platform (see box for full results).

Usability came out on top with 55 per cent of  advisers, saying this was “very important”.

Fifty-one per cent thought products and funds offered on the platform were very important and 44 per cent rated cost as being very important.

Some 72 per cent said they have not changed platforms since the RDR.

Respondents were also asked if they were worried about the impact of consolidation in the platform market on their chosen platform after Aegon’s purchase of Cofunds and Standard Life’s deal with Elevate.

However, only 18 percent of advisers said they were worried about this activity in the market.

One-third of advisers are concerned about the impact of replatforming projects and their associated costs on the platforms they use.

Advisers saw  the strength of commitment from a platform’s parent company as important, however, and Platforum senior analyst Miranda Seath says the research agency has noticed this is becoming an increasingly important measure for some advisers.

Consolidation in the platform market has seen businesses such as Cofunds and Elevate change owners while other parent companies are committing millions of pounds to invest in technology upgrades for their platforms.

Seath says: “The challenge is it can be difficult to determine the financial stability of platforms and commitment of the parent company. Advisers do need to be engaging with platforms themselves as they go through this process.”

That usability was important to advisers was no surprise to Polson, although he emphasises there is a difference between usability and service.

Polson says: “There are some platforms that have not necessarily always got good service but they are very usable and I would include Cofunds and Old Mutual Wealth.

“Those platforms, from a strict usability perspective, are pretty decent. The reason for that is because they were designed to be quick and easy and they deal with a lot of lower value business.”

Polson makes the point about service and usability being conflated.

He says: “What they mean is does it break and does it work when I put in the instruction I want.

“A lot of that will come down to service rather than usability so it is important not to confuse the two.”