Platforms and wraps?

dunstonh

Can I ask you two more questions please? In the highly unlikely event of a platform going bust (and let's bear in mind the situation with Lehmanns and half the banks in the UK over the past couple of years) do I stand to be wiped out?

No. The funds on a platform are held under a trust and nominee basis and ringfenced away from the assets of the platform administrator.

And what is the legal status of the platform? Is it an agent, a broker, a principal, a bank, an IFA - or something entirely new?

Depends on the products they offer but product provider would be a generic title. If you had the ISA on the platform they would be the ISA manager for example. However, for simplicity, their main role is administration.

jillk_2

That's great - many thanks indeed for your help. My mind is as clarified as spring water.

EdInvestor

You may like to compare the costs charged by an execution-only discount broker operating outside the IFA system.

https://www.h-l.co.uk

This broker will refund initial charges on new investments and part of trail commissions on ongoing ones.Separate (transparent) charges are made to cover investments which don't pay commission to the broker (eg direct shares and gilts, investment trusts,ETFs etc) , plus a small annual fee may be levelied in such cases - there is no annual fee if unit trusts are used.


If you are a long-term investor who rarely trades, you may not need to bother with the costs of an advisor, much less pay the additional costs he may now be trying to charge you to make it cheaper for him to run his existing business.

koru

Most of the wrap platforms used by advisers seem to add a layer of extra charges, such as an annual charge of 0.5% (can be higher or lower) of the value of the assets held on the platform, plus a dealing fee for each purchase or sale, such as £15 per transaction, plus an initial charge equal to a percentage of the amount invested, plus a fee for switching investments. Some platforms have all these charges; some have only some of them. The level of fees varies between platforms and in some cases (such as Macquarie) the fee rate reduces depending on the total amount the investor has invested.

So, potentially, the platform adds a layer of cost, but in some cases the platform will earn commission from the underlying investments and will rebate some or all of this to the investor, which might reduce the net cost of the platform or even give a net benefit for the investor. For instance, unit trusts typically charge a 1.5% annual management charge each year, but with the Macquarie wrap this would be reduced to something like 0.75%, depending on the particular fund.

As said in an earlier post, there are some investor platforms which are available direct to investors, and in some cases these might overall be cheaper, because they tend to have lower platform charges, although they may not rebate as much commission. Hargreaves Lansdown typically rebates 0.25% annual commission on unit trusts, so on the average unit trust the investor would be paying 1.25% annual management charge on the fund, and no further charges by HL. On other investments such as investment trusts and ETF's, they do make a platform charge. Alliance Trust Savings is similar, except it rebates all the commission it receives, which is typically 0.5%, so the investor pays a net annual management charge of 1.0%. However, ATS charges £12.50 for each transaction. No extra charges for investment trusts and ETF's, however.

On some investments, such as unit trusts, the fund levies a one-off initial charge when the investment is first made, typically 5%, but you would normally expect the wrap platform to rebate all or practically all of this.

I have found that for some investments ATS gives the lowest combined costs of the wrap and the underlying investment, in other cases HL is cheapest, and in other cases the Macquarie wrap is cheapest, but the same might not be true for someone who had less invested with Macquarie or for a different wrap, such as Standard Life. You really need to get the full details in order to make a decision.

dunstonh

Most of the wrap platforms used by advisers seem to add a layer of extra charges

This is why most IFAs dont like wraps and dont use them. Those that do, tend to do it for their own benefit which is the bit that irritates some.

However, I notice you didnt mention fund supermarkets that advisers use. These are the most common platforms used. These usually incur no extra charges and are often cheaper. Sometimes even more so than the DIY platforms.

Some platforms are priced to be competitive for larger investments and uncompetitive for smaller ones. That way they cherry pick the quality end of the market and not the smaller value/high volume end which tends to be more expensive.

koru

dunstonh wrote: »

However, I notice you didnt mention fund supermarkets that advisers use. These are the most common platforms used. These usually incur no extra charges and are often cheaper. Sometimes even more so than the DIY platforms.

Sometimes, I agree. But do they rebate any AMC?

dunstonh

Sometimes, I agree. But do they rebate any AMC?

Yes. The choice to rebate or not is with the adviser. More likely to occur with fee based advisers or execution only cases. By 2012, the remaining platforms that dont yet allow rebating will have to.

Charterhouse

Does any of this cover a pension?

The reason that I ask is because I recently received the following from my IFA, it makes reasonable sense to me:-

Since my move, and following the pension and tax changes in April 09, I have been carrying out pension reviews for my clients holdings.

The reasons behind the review are:
i) Maturity values. Recent changes to pension legislation have brought about changes to charging structures within pensions. This has led to various providers coming up with newer lower-charged products;
ii) The access to large fund discounts - certain providers and products reward the client when the fund gets over certain values, by reducing the charges on the pension funds;
iii) Increasing range of pension funds - looking at those providers with large ranges of funds, and large ranges of external providers;

In your case, I have looked at the pension you have with me, with <Existing Provider>, and looked at moving it into a new scheme, with lower charges, and a better fund range.

a) Looking at your previous Risk Profile Assessment (attachment 1), this gives me a distribution of asset allocation to use;
b) Attachment 1 is also used within the choice of providers, as I need to ensure that the fund range is available within the prospective provider. The Synaptics reseach engine then comes up with the most suitable provider - attachment 2. As you can see, the scheme considered most suitable was the <New Provider>:


I then ran a series of projections to look at future fund values - assuming 5%, 7% and 9% growth across all plans. This then represents the actual costs applied to each plan. These projections assume ongoing contributions at the current level of £XXX per month gross. The various illustrations from which the following table came are attached above.

Pension Scheme Fund Values
5% 7% 9%
Existing Provider £336,000 £479,000 £689,000
Potential New Provider £353,000 £502,000 £722,000

For what it's worth, my IFA receives nothing in commission and is only paid for his time and advice, as I invest everything myself through Cavendish Online (this pension is an old investment from before I did that).

dunstonh

Does any of this cover a pension?

Yes. Most platforms offer the pension tax wrapper.

i) Maturity values. Recent changes to pension legislation have brought about changes to charging structures within pensions. This has led to various providers coming up with newer lower-charged products;

Yes. Very reasonable and correct. There are two major changes. One that came in April 2006 and the other is coming in 2012. Contracts are now available that factor in those changes and these are often cheaper and/or better for investment selection.

ii) The access to large fund discounts - certain providers and products reward the client when the fund gets over certain values, by reducing the charges on the pension funds;

Also correct. There are some pretty big fund based discounts available now. 0.6% for example on a 1.0% amc. Whereas years ago you were lucky if you got 0.2%.

For what it's worth, my IFA receives nothing in commission and is only paid for his time and advice, as I invest everything myself through Cavendish Online (this pension is an old investment from before I did that).

Strange decision to do that as Cavendish only offer a limited panel of providers and myself and other IFAs that have posted here have found that Cavendish's nil commission terms are not always as good as networked IFAs.

It also means that your IFA is not able to access data on your pension as its allocated to Cavendish as the IFA.

If you are doing fee basis then doing it yourself through Cavendish is harming the advice being given.

Charterhouse

dunstonh wrote: »

Strange decision to do that as Cavendish only offer a limited panel of providers and myself and other IFAs that have posted here have found that Cavendish's nil commission terms are not always as good as networked IFAs.

It also means that your IFA is not able to access data on your pension as its allocated to Cavendish as the IFA.

If you are doing fee basis then doing it yourself through Cavendish is harming the advice being given.

I should clarify, I execute personal investments ISAs etc through Fidelity using Cavendish and so far I must admit the terms have been much much better than anything I've previously used - 0-0.25% on every single fund I've wanted so far. If you know of ways to do better than that I would love to know them.

The pension was set up maybe 6-7 years ago and I won't do it via Cavendish, I'll probably take my advisor's advice.

For what it's worth his advice costs £100 a year, which for the total amounts I'm effectively managing is less than 0.1%, so I think it's good value. I don't really need much advice.