By Tom Dudley, Partner, Thistle Initiatives
The UK’s investment platform market is facing twin challenges. New Consumer Duty regulations are requiring firms to demonstrate they are providing value to customers at a time when increased competition and the battle over investor flows distort prices, which are being squeezed ever lower.
This competitive environment means many platforms are forced to review their pricing model and in some instances offer steep discounts to entice new business or stem outflow. This means a platform’s headline rack rate can end up being well above the price actually being paid, skewing perceptions of what the true value is. For instance, a firm might have a rack rate of 30 basis points, but if an advisor is looking to move half a billion pounds in client assets, most platforms will offer a justified discount to land that account based on a likely reduced cost to serve. Therefore the cost on paper that we see is not the real cost.
The dilemma platforms are grappling with is how to hold the line against steep discounters—and this is something where the new Consumer Duty rules could actually be flipped around and turned into an advantage rather than being seen as a commercial burden.
Under the Consumer Duty fair value requirements, firms must provide evidence that the price a customer is paying is reasonable for what they are getting in return. If done well, firms will have captured the value of their offering through this exercise and the monetary benefits that are being provided to the customer. By focusing on those benefits, firms can shift the narrative away from the fixation on price and discounting and reframe value through the entire proposition the platform offers. In many instances, those benefits are worth a lot more than the discounted rate being charged, and if a platform is offering a feature that its peers aren’t, then the product should be priced accordingly.
We call this the value premium. Say, for example, a firm offers instant deposits where client money is invested days sooner, or they offer an element of pre-funding—effectively staking the firm’s own money before the client’s money arrives. This means client are gaining a growth opportunity—something that has a clear monetary value to the client and something other platforms may not be able to match. Therefore platforms should use their fair value assessment to demonstrate to advisors what these benefits equate to in pounds and pence. This value premium should be taken into account when comparing platform prices, moving away from the fixation on headline rate.
This is effectively a new way of thinking for platforms when it comes to value. Imagine a typical commute to work. Walking might be the cheapest option, but it may also take the longest—time that could have been spent being more productive. Driving to work might cost more relative to walking, but the returns gained from being more productive will likely far outstrip the cost saving that might have been generated by taking a long stroll to the office. Therefore platforms need to consider their benefits in these terms and recognise that the missed opportunity of growth has a significant value. By adopting this way of value premium thinking, instead of feeling strong-armed into offering discounts to entice advisers, platforms can better justify their rack rate and make the case why a discount is unwarranted and evidence that ultimately the client is getting a better product.
Figuring out your value premium isn’t difficult if you have a consistent well thought through approach. At Thistle Initiatives, we have built a robust VFM framework and methodology to help firms assess their value premium, including tooling around platform comparison to help demonstrate why a particular platform offering could be worth more.
For advisors, this can make it easier to compare platforms with greater clarity around price and value, while our Asset Migration Tool can help advisors move client assets quickly and compliantly to capture those benefits sooner.
This approach may just help hold the line and stop the race to the bottom on price, enabling firms to end discounting and start restoring margins. It can also support both platform switching and technology improvement—areas the FCA are keen to see—all while better demonstrating fair value to customers and remaining compliant with Consumer Duty regulations.