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January 1, 2013 4:35 pm
Online platforms offering financial products direct to retail customers are expected to be the short-term winners under new UK regulations that will make investors pay fees for financial advice, from now on.
Under the Financial Services Authority’s Retail Distribution Review – which took effect on January 1 – independent financial advisers can no longer receive commission payments from fund managers and insurance companies for selling their investments and policies. Instead, advisers will have to charge upfront fees for the advice that they give, or deduct these fees from the sums invested.
These changes are intended to reduce the risk of commission payments acting as an incentive for mis-selling.
However, with many clients expected to balk at paying overt fees for what they had previously perceived to be a “free” service, analysts forecast that online platforms – which sell investments without advice – are set to attract new business.
Some clients of private banks and wealth management firms may even find they are no longer offered advice, as managing their assets will not generate sufficient adviser fees, the analysts add.
“RDR causes investors to pay for services they are not typically used to paying for,” notes Peter Lenardos, an analyst at RBC Capital Markets. “Platforms could become more attractive for individuals who have assets below the minimum thresholds of private wealth managers.”
Recent research by Deloitte estimated that the move to fee-based advice under the RDR would create up to 5.5m “disenfranchised” customers. According to the study, these customers will either stop using their existing financial advisers or be denied access to new advisers because they are not deemed cost effective.
Online platforms impose no such minimum investment levels, as they do not have advisers or costly overheads to pay – and, for the next 12 months, will still be able to receive payments from product providers.
“The platforms will be the beneficiaries on the one side, in terms of the asset growth,” says Gurjit Kambo, an analyst at Credit Suisse.
Analysts have not yet quantified the extra revenues that platforms are likely to attract. However, data from the Investment Management Association, a trade body, and the research firm Platforum show that the direct-to-consumer funds market is worth £73bn, or 13 per cent of total UK retail investment.
Mr Kambo forecasts that Hargreaves Lansdown has the potential to gain the most, given its existing dominance of the retail platform market.
Ian Gorham, chief executive of the Bristol-based company, says he has already seen an inflow of new customers in the lead-up to January, but expects that to “substantially increase”.
He argues that the inflow of clients and assets has been prompted not only by the RDR, but also by improvements in technology that have made investing via online platforms more accessible.
Nevertheless, some analysts warn that it could take months for the initial impact of the RDR to be felt by the industry – and point out that online platforms will have to adapt to the second phase of the regulation, which is expected to stop them receiving payments from providers, from January 1, 2014.
With no payments coming in, they would also have to start demanding fees from their users. At that point, says Mr Kambo, even the platforms are “going to start getting some negative impact”.
At present, there is still uncertainty over the rules that will apply to platforms in this second phase. In November, the Financial Services Authority began informal discussions with product providers about a potential ban on all their payments to platforms. It says its aim is to make all charges clearer to clients, and to reduce the potential for platforms to favour specific providers.
Competition among the platforms to win new customers is also expected to increase. “There is going to be a bit of a land grab and [investors] will be looking at price as well as service,” says James Hamilton, an analyst at Numis.
For example, advice firm Bestinvest recently launched a non-advised guidance service for retail investors. It will analyse their portfolios for free, without the need to appoint Bestinvest as an adviser or “agent” – a move intended to capture some of the disenfranchised clients of other advice firms.
However, if competition increases, the benefits of new revenues will be offset by a squeeze on profits. Mr Hamilton forecasts that platforms’ margins will come under pressure, as they move to a fee-based approach. “There will be pricing changes across the entire industry,” he says.
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