The financial regulator, the Financial Conduct Authority (FCA), says that investment platforms should make it easier for people to shop around on the basis of price and to switch to another platform.
What is an investment platform?
An investment platform (sometimes just called a platform) is like an online supermarket for investments. You can buy investments from different asset management and investment companies. If you invest through an investment platform, you can also keep your investments together.
SAVVY TIP: Before investment platforms existed, you would either buy funds directly from an investment company or via a financial adviser. If you bought them directly, you could end up with a separate account with each investment company.
There are two types of investment platforms: those that are aimed at consumers and those aimed at financial advisers.
What is the problem?
The FCA says that on the whole, the market for investment platforms is working relatively well. However, it did find that one investment platform aimed at consumers has 40% of the market. The FCA identified the following problems:
- Shopping around can be difficult. If you want to switch to a cheaper platform it can be hard, if not impossible, to compare charges. The FCA found that almost a third of people didn’t know if they were being charged for using the investment platform or what the charges were. The FCA said that investment platforms could improve the way they set out charges at different stages of someone’s decision making.
SAVVY TIP: The FCA found that people who paid more for an investment platform generally got more for their money. It didn’t find that – as a whole – people were being charged more for no reason.
- It can be hard to switch platforms. Switching your investments from one platform to another is not necessarily straightforward. It can take time and the process does not always run smoothly. The FCA said that those who would benefit most from switching were put off.
SAVVY TIP: The FCA found that 7% of people who’d tried to switch in the past didn’t do so because of the time involved, difficulty of the process or the exit fees. Switching can be sorted out in a couple of weeks or it can take several months. Where someone has invested through a platform after taking advice from a financial adviser, the adviser didn’t generally suggest that they move their existing investments to a different platform, even if it could benefit them.
- The risks and return information of model portfolios were unclear. When you invest through an investment platform, you can choose one of the platforms ‘suggested’ portfolios. These are generally aimed at people who are investing for the first time and different funds carry a different level of risk. The FCA found that the way these funds were described wasn’t particularly clear.
SAVVY TIP: What the FCA found was that funds that were labeled in a similar way could invest in very different assets. For example, one fund might invest in a higher percentage of shares than another, or riskier shares.
- People may not realise how much they are losing out by holding money in cash. If you keep money in cash on an investment platform you may not get any return at all. The FCA found that some people a sizeable amount of money in cash without realising that they weren’t generating any profit on it.
SAVVY TIP: The FCA found that almost 9% of money invested via platforms that sell investments direct from consumers, was held in cash. This compared with 3.9% of money when someone had invested after taking advice from an independent financial adviser.
- So-called ‘orphan clients’ are losing out. This rather odd term refers to people who used to have a financial adviser, but who don’t have one anymore. The FCA found that investment platforms can charge them higher fees but give them a worse service.
SAVVY TIP: People who originally invested through a financial adviser aren’t able to access and switch their investment funds in the same way that someone who invested directly can. The FCA found that people who used to have a financial adviser could also be charged up to 0.5% extra by the investment platform.
What’s changing in 2019
There are already plans underway to make it easier for people to switch platforms.
- If you transfer your funds without cashing in the investments (called a ‘stock transfer’ or an ‘in specie’ transfer( this can sometimes take weeks or even months. The FCA wants to introduce a maximum time for each step of the process.
- Information you’re given about the transfer process: The FCA wants people to be given clearer information about the transfer process. This would include what’s involved and who they should contact if they have a question or a complaint.
- The FCA also wants investment platforms to either publish transfer times or to use a minimum set of standards. These standards state that transfers should take place in a ‘reasonable’ time and in an ‘efficient’ manner.
SAVVY TIP: These changes should take place by early 2019.
What else could change
The FCA is also considering further changes, such as:
- Banning exit fees. These are fees imposed by the platform you’re leaving, when you transfer.
- Improving switching between share classes. A share class is a bit of an odd concept. When you invest in a fund, it issues different share classes. Some may be available only to pension funds and large-scale investment funds, others may only be available to someone who invests through a financial adviser, for example. Transferring can be held up if there are different share classes involved.
SAVVY TIP: You can read more about the different share classes in my article called What are the different share classes in funds?
- Introducing help for orphan clients. The FCA wants platforms to help people switch, if there are better options available. It’s also concerned about the extra charges orphan clients pay. Finally, it wants platforms that sell through advisers to check if clients are still getting advice (if they haven’t touched their investment for a year).
- Help for people who use ‘model portofolios’. The FCA is concerned that some people who’ve invested in these funds may be taking on more risk than they realise.
What happens next?
The FCA is going to consult on seven further changes to the way platforms operate. If you’re interested in reading more about these changes, you can find them on page 95 of this FCA report into platforms.
Photo by Porapak Apichodilok from Pexels
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