Fidelity's Ed Dymott recalls Supermarket Sweep to make a pricing point...
Once in a while, a point is raised that looks to challenge the fundamentals of how an industry works. One such point is fixed price charging for platforms and fund managers.
The question is based on a simple belief that these services are based on a fixed number of people and a lump of technology. Why not divide the total costs by the number of customers, add a (fine) margin and, hey presto, there's your cost? In theory, it makes sense, but it does not really work this way.
In a perfectly transparent and unbundled world, I have considered writing to my local supermarket to ask it to change the way it charges. Rather than collect its margin based on the total basket of goods at the till, I would like it to consider charging me explicitly for each service I use. For example, I quite often walk to the supermarket, so perhaps I should get a discount for not parking. I am also pretty quick once I get there, spending less time than the average person, and this should surely be reflected in my bill. I am self-sufficient too, navigating my own way around the store, so I would not mind if it charged customers for each question they put to an attendant. Finally, I bring my own bags, have a slight bias towards the 'finest' range products and believe I can break world record speeds for packing. The more I think about it, the less I should be paying.
Fidelity's business development head remembers Supermarket Sweep to make a pricing point...
Yes, this is a little farcical, but it does show how theory does not always work in practice. I am sure my local supermarket could work out its total revenue per store, divide it by the footfall and from then on charge customers a fixed fee per visit, or even a charge based on time spent in store. Other than encouraging a Supermarket Sweep kind of scene – the image of which rather amuses me – I am not sure what the benefit would be. It would create some very obscure behaviour.
Platforms and fund managers are the same. Largely, these businesses work off a variable basis point charge that covers the cost of many of the activities. Some platforms do charge per transaction – so fixed fees per account – but there is normally always a percentage charge. Fund managers are almost exclusively percentage charged. In the past few weeks, I have been challenged on both as to why these are not a pure fixed fee per service.
Platforms are possibly more aligned to fixed fee pricing. In theory, they could charge per activity. However, this would introduce a myriad of charges – charging per holding, per distribution, per transaction, per payment, per report and for each service interaction. You could try and work out a fixed fee per account but, again, there would be too many variables to consider. There is also this basic fact to consider: the larger the account value, the higher the costs.
Fund management business is even more difficult to charge on a fixed basis. Yes, funds are usually a combination of people costs with a number of underlying transaction costs, but the costs of running a fund increase with volume. We would also see a perverse situation where costs would go up even if the markets – and performance – went down.
I may be taking this example to the extreme to make a point; however, I think it is too simple a view to suggest platforms should move towards a fixed fee model. I see platforms increasingly doing a number of things.
Firstly, I see more platforms using a combination of fixed and variable fees – this better reflects the cost of the service and shows there are some economies for larger cases. I also see tiering, and there is a debate here around whether the fees should tier based on the quality of the underlying client or the quality of the adviser firm. My belief is the latter will become more prevalent, as platforms look to align themselves with their most valuable clients.
I am not against fixed charging – there is a place for it in the market. I especially think it is appropriate for businesses that work on a time and materials basis – such as many financial planners. Where there is a fixed activity taking a fixed time, a fixed price makes a lot of sense. Unfortunately, platforms do not fit neatly into this model. I therefore think we will see basis point charges continue for some time to come.
Ed Dymott is head of business development at Fidelity Worldwide Investment.
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