The way investment tools are provided and paid for may be about to change. Dave Chessell, sales director at IntelliFlo, explains why...
The market for investment tools is peculiar, largely because providers have delivered tools as a ‘free’, loss-leading service. Although customers who decide to invest end up covering the costs via product charges, the levels of platform profitability across the market hardly suggest this model has worked well.
Rather than pile ahead with ever more sophisticated and expensive tools, this suggests it could be time for the industry to pause and think how these tools are actually delivered and how they are paid for?
In the beginning...
In the early days, tools were seen as a useful way of justifying the higher costs of open architecture and helping advisers to make sense of large fund ranges. This was the position in the 1990s when the first tools started to emerge.
Investment tools: time for a rethink?
At that point, development costs were almost trivial in comparison to the market today. Furthermore, it was generally money well spent as tools made an important contribution to market perceptions of the expertise of providers.
Roll forward a few years and everyone was embracing open architecture. Platforms and wraps were really starting to take off and every salesman needed tools, every adviser had an idea for a new tool and every provider jumped on the tools bandwagon. Specialist tool companies started to crop up and some organisations made small fortunes as spending became indiscriminate.
As the stampede gathered pace tools became a hygiene factor. Almost everyone justified spending on tools with the lame justification that the charges associated with any assumed sales impact would be conveniently large enough to cover any costs. This sort of approach is only possible when you have scale and distant shareholders and explains why most of the late and independent entrants into the wrap market have been more discerning providers of tools.
In the past 10 years it is highly likely the cumulative cost of developing and maintaining tools has exceeded £100m and the peculiar nature of this market means providers have not charged anyone a penny for using them. The reason charging for tools never really took off was that, as everyone developed similar and product-focused tools, there was little incentive for anyone to pay for them.
An associated problem concerns how most tools do not easily accommodate off-platform assets. This has emerged as the market has developed a more sophisticated understanding of analysis and as tool providers have unwittingly highlighted this weakness by attacking the limitations of each other’s tools and approach. A number of observations made by the FSA have also made it clear that not taking a complete holistic view is a major limitation.
While many commentators talk of using single propositions, the insight we have from our own coverage of the market tells us that businesses work with 2.8 platforms on average and that relatively few clients are 100% consolidated on a single platform. In many ways, working with several propositions has become inevitable given the emphasis on segmentation and how impossible it is for a single proposition to be genuinely suitable for each and every client.
This suggests that, in the post-RDR world, advisers will need a holistic approach supported by a technological consolidation.
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