A Monthly Publication

By Robin Sainty

With investment conditions continuing to improve it seems appropriate to look at how the structure of the investment market is changing as we move towards the implementation of the Retail Distribution Review in 2012.

              In much the same way that the pensions simplification legislation that came into effect in 2006 significantly altered the pensions landscape, so we are seeing the same process taking place in the retail investment marketplace. This is extremely relevant to consumers because it will have the effect of driving down costs, expanding choice and increasing flexibility as we move into a new era, which is likely to be dominated by fund platforms.

At its simplest level the idea behind a fund platform, sometimes called a wrap account, is the aggregation of existing portfolios backed by online trading. Generally people accumulate a range of investments during their lives, in the form of cash deposits, ISAs, bonds, unit trusts, stocks and shares and so on. Typically these will be with a range of companies and institutions, making ongoing valuation a rather time consuming process, and creating a lot of work when tax returns are required. Switching from one product to another will typically involve initial charges, potentially creating a disincentive to react to underperformance until it becomes pronounced.

The advent of platforms has had a profound effect on the structure of the asset management industry across Europe and is changing the rules of the game for asset managers, advisers, customers and regulators alike, and not only are they here to stay, they are set to expand, with platforms controlling £76 billion of UK fund assets by the third quarter of 2008.

From our point of view as advisers, the advent of platforms will allow us to re-register existing funds (so avoiding the attendant costs of selling and rebuying) and allow for more efficient portfolio construction, while the ability to trade online in shares, Exchange Traded Funds (often much cheaper that mutual funds, OEICS and unit trusts) and Investment Trusts will allow for the creation and management of much more diversified portfolios with free switching encouraging the speedy replacement of under performing components.

To try to give an example, a typical portfolio might include investment bonds with Aviva and Standard Life, Isas with Gartmore and Fidelity and some individual shares, as well as pensions with Legal and General and Zurich, all with different charging structures (some of which are likely to be less than explicit) and different phone numbers and websites to contact for valuations. In addition, following a coherent asset allocation strategy, including rebalancing will be virtually impossible due to different fund ranges from different providers.

A platform approach allows simple solutions to these problems. By re-registering the existing funds onto the platform, within the relevant wrappers (i.e. investment bond, Isa, pension) it is possible to cut out the various product providing companies involvement, which should automatically reduce costs. Valuation of total holdings is simplified and can be achieved online at the click of a mouse at any time, and, in addition, future portfolio rebalancing and buying and selling of assets can be dealt with very simply and, more importantly, cheaply. In addition platforms will include risk evaluation and portfolio modelling tools and the wherewithal to carry out effective estate planning.