Dissecting the issues on platform due diligence following the Financial Conduct Authority's recent thematic review. Co-authored by Miranda Seath and Danby Bloch.

    Due diligence is an activity that most advisers take seriously – both from a cost point of view and at the level of functionality and service. But in the Financial Conduct Authority’s (FCA) recent thematic review TR16/1, platform due diligence was singled out. The regulator’s report card clearly stated that advisers could do better.

    A status quo bias or a familiarity bias?

    The strongest FCA finding was that some advisers display status quo bias. The assertion is that advisers don't change platforms much and if they carry out due diligence, they know the result they want and mostly they like what they know. This is hard to confirm or disprove.

    If advisers are assessing a low number of platforms, this could support a status quo bias.

    Platforum’s latest survey shows that 6 out of 10 advisers consider at least 6 platforms in their due diligence. 87% consider at least three platforms. Many advisory firms should be conducting comprehensive reviews of a broad range of platforms. But a focused due diligence approach might well be appropriate for advisers who have clients with specific requirements. If a large proportion of the platform market isn’t going to make the cut, is it critical to review it anyway? We shouldn’t advocate a one-size-fits-all approach.

    Figure 35 shows the number of platforms that advisers are reviewing when they conduct due diligence.

    [caption id="attachment_12855" align="alignnone" width="590"]bar-chart Figure 35: Number of platforms reviewed in due diligence Source: Platforum, April 16 How many platforms do you review when conducting due diligence? Base: 259 advisers[/caption]

    Familiarity bias

    Where advisers did plead guilty to status quo bias was the sheer difficulty of starting to use a new and unfamiliar platform. There is the strangeness of the new interface to contend with and unfamiliar processes. But more importantly, advisers spoke of the need for extensive training and familiarising themselves with a new digital environment. Not insurmountable challenges but ones that give pause for thought.

    Degrees of separation - service levels to the client vs service levels to the adviser

    The FCA were disappointed to find that "in some cases, firms placed the level of service they received ahead of the level of service received by the client." Our data does not distinguish between these two types of service. When we discussed this comment at our roundtable, advisers were not able to distinguish the sorts of service from platforms that benefited the adviser but not the clients.

    "Easy switching or rebalancing, the availability of funds, rapid correction of mistakes could all be said to benefit advisers. But in fact they are very important to clients."

    If our panel of experts couldn’t distinguish the difference, then we feel that further clarity is needed from the FCA on this point.

    Placing new business on a platform vs switching existing assets

    One issue that the FCA did not pick up on is the crucial difference between deciding whether to give new business to a platform and deciding whether to transfer business away from a platform to another one. This should have an impact on advisers’ approach to due diligence because the considerations are different.

    The decision to place new business with a particular platform is not one to take lightly - involving training, risk of mistakes (by the platform and the adviser firm) and all sorts of unknown unknowns.

    New business

    We asked advisers to list the qualities of their perfect platform to find out what they want in an ideal world.

    Top of the list are:

    1. Low charges
    2. Investment choice
    3. Usability
    4. Service
    5. Functionality
    6. Financial stability

    Low charges and investment choice are the most client-centred issues along with financial stability. The next three criteria could affect clients who access the platforms themselves but they are probably more adviser-related.

    For deciding to place new business with a platform we see that:

    • The criteria for making the change are slightly different - cost is a key factor.
    • The bar is lower - the decision is simpler.

    Switching platforms for existing assets

    The decision to transfer away from a platform to another platform is a much more serious matter.

    • It involves more work and therefore significantly more cost
    • There may be tax issues
    • The client might be out of the market with respect to some investments
    • There are additional complications with moving model portfolios from one platform to another - especially if the new platform does not support all the previous funds
    • The client will need to be persuaded to pay for the transfer - which could be a problem if the adviser recommended the initial transfer
    • The new platform might not provide the same functionality as the first one and there may have to be changes in the portfolio

    Unsurprisingly the criteria for making a switch have to be more demanding than for just deciding to place new business. As a result the reasons for making the switch are not exactly the same.

    Advisers we surveyed are transferring assets away from platforms chiefly because of service levels, usability and functionality; only then do cost and investment choice come into play.

    The due diligence drives the choice of a new platform - experience drives the move away from an old platform.

    Download a copy of the Nucleus white paper: Questions advisers should ask platforms today.

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