Consumer Duty rules push consulting firms to run their own platforms

In a white paper produced in conjunction with Altus and released today (November 16), the company explored the future of platforms and highlighted the importance of thorough due diligence to get the right outcomes for customers as regulatory pressures are increasing.

In his research, Parmenion explored how advisors could get the value they need from platforms.

“In very simple terms, the role of a platform is to receive money, process it and disburse it,” the company said.

“Doing this effectively should be table stakes, but frankly, there are still far too many examples of delay, duplication and waste in the industry. The potential reward for platforms that address advisor frustrations and this inefficiency, in a way that makes life better for both advisors and consumers, is always meaningful.

“Take model portfolio rebalancing, for example. MPS (Model Portfolio Service) is an increasingly important part of the investment landscape, and about half of these models are run on an advisory basis.”

According to the whitepaper, the way advisors go about obtaining client consent, communicating it to platforms and then executing a rebalancing is, in most cases, extremely laborious and repetitive.

“These features make it a classic candidate for automation, but technology investments are needed to handle three-way authentication between platform, advisor, and client,” the company pointed out in its research.

“The MPS example is just one of many. Inflexible pension payment processing, slow, manual and paper-based transfers, and inconsistent fund data are all areas that can be improved. and where technological solutions already exist.

“Investment in smart technologies will be key to future success in the platform industry.”

The right model

After 20 years of development, it seems clear that there is no single ideal model for an investment platform, according to Parmenion.

He pointed out that several variants had appeared and that there was no perfect implementation of any of them. “The right answer for your business will require tough trade-offs between coverage, price, functionality, service, and technology, among others.

“Through changing market dynamics of commoditization and regulation, the value of a platform increasingly depends on a strong alignment between the consulting business and the platform service.”

Research showed that poor service was the top reason advisors leave the platforms, but ranked eighth on the list of filters when advisors searched the platforms; sub-threshold platform capabilities such as Individual Savings Account (ISA) availability, advisor billing and asset availability.

Poor service is a huge, unforeseen cost that clients pay, and advisors need to take a closer look at service to reduce those costs, Parmenion says.

Investment platforms need to refocus their approach to align with advisory firms based on target market and philosophy, the company said.

“The days of giant platforms offering universal services may be numbered. Successful platforms will focus on more narrowly defined niches and direct development towards adding value to these businesses, as well as the good doing the little things.”

Manage your own platform

According to Parmenion, advisors often experience a disconnect between support for new business and ongoing service, a potential hangover from pre-RDR when advisors were seen as a distribution channel for products, rather than the representative of the service. final customer.

The company said: “The platform’s revenue growth is driven by net inflows and, in good times, by market growth. Combined with the complexity and complexity for advisors to transfer volume of important business off a platform, it’s no surprise to see many platforms focus on integration.

“There is also frustration with the speed of development. In the early days of platforms, 150 basis point margins were not uncommon, but as the technology and processes matured, it became a business. at increasingly low margins, especially in the intervening space.

“Platforms have faced margin pressure from the removal of fees, heightened end-user expectations and regulation that has increased the cost of doing business. Pure platform operating margins have declined and fostered vertical integration, especially in the investment part of the value chain.”

Research found that advisors, who were closer to the customer, felt the fallout from these shortcomings more intensely than the platforms, and naturally began to question whether it might be better to take on the responsibility of the services themselves. platform, added Parmenion.

“In response, we have seen the emergence of an ‘advisor-as-a-platform’ model, driven by new technology entrants such as Seccl, Hubwise and Multrees. This model typically offers a front-end portal with trading and custody , while the advisor retains client management, front-end administration, client support and some or all regulatory approvals.”

Due diligence

In 2016, the Financial Conduct Authority (FCA) introduced the Product Intervention and Product Governance Sourcebook (PROD) which formalized platform selection, after TR16/1 concluded that poor quality research and due diligence of a consulting firm was one of three root causes. for poor consumer results, Parmenion explained.

Third-party research and due diligence tools benefited as advisors sought a solution to large-scale due diligence, but it inadvertently led to homogenization as platforms adjusted their proposals to avoid confusion. be filtered, he said.

Parmenion Managing Director Martin Jennings added: “While Consumer Duty appears to be the biggest shake-up in financial services since the RDR, we expect big changes in the platform industry.

“We believe there is no progress without debate, so we encourage our colleagues in financial services to share their thoughts on our report as we look to the future.”

Altus Managing Director Kevin Okell said, “It’s easy to forget how integral investment platforms are to professional, independent advice. With the platform-advisor relationship set to become even closer under Consumer Duty, it seems clear that due diligence is about to be taken to a whole new level.”