Platforms flush with loss-making cash

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Investment platforms are flush with £20bn of cash that could be losing their clients money, research from consultancy The Lang Cat has found.

The cash accounts make up 6.5 per cent of assets under administration, the consultancy has calculated – much higher than the 2 per cent needed in the majority of cases to cover platform and adviser charges.

The strong cash position, approximately triple what it should be, is particularly worrisome due to falling interest rates.

“Negative net positions started to creep in last year but it’s now becoming widespread. If there is notably more than the minimum to pay transactions held in cash, you’re essentially signing up to a loss,” says Terry Huddart, market analysis manager at the consultancy.

He says despite the continued fall in interest rates that platforms are able to pay, the percentage of assets under administration in cash accounts has held relatively static meaning clients risk of losing money.

Huddart says the average cash accounts are even higher than 6.5 per cent on some platforms.

“Today the rates paid by platforms range from 0 per cent and 0.5 per cent, but in some cases the platform charge is also deducted.

Huddart says payments for regular and one-off withdrawals could be reasons to hold more than 2 per cent cash.

“However, it’s increasingly important to ensure platform cash is deemed as a short-term holding and to look beyond the headline rate to the true net position.

“There is little refuge in money market funds either, as OCFs have been higher than returns. Platforms were able to maintain a workable rate for some time, even during the long period of the 50bp base rate, but that’s highly unlikely going forward.”

Platform James Hay recently said it may have to review its pricing structure as it forecasts a £1.2m hit to revenues as a result of the cut to interest rates.

On the other hand, Old Mutual Wealth and Aegon say they don’t retain any margin on client cash. Where clients have holdings in cash Old Mutual passes interest to them in full. Currently the rate of interest on cash is 0.2 per cent.

Ascentric head of marketing Sarah Lyons says as cash accounts on platforms are primarily there to pay fees and charges, and not generate returns, the amounts held are usually “kept to a minimum” by advisers.

She says: “Ascentric has not passed the current cut in interest rates onto clients. We want to make sure that we do the right thing by advisers and their clients and so we have not reacted immediately to the recent interest rate change.

“Ascentric also does not have a platform charge on its cash account, which is different to many of our competitors.

“Where a platform charge is taken on cash holdings, the knock on impact of lower interest rates is that clients will start to see negative returns. This is why it is really important that the cash account is only used for transactional purposes to pay fees and charges.”