WHAT’S WRONG WITH THE CASH MODEL ANYWAY?
HUGO THORMAN, MANAGING DIRECTOR OF WRAP PLATFORM PROVIDER ASCENTRIC, TELLS ALL TO IFA MAGAZINE
Hugo Thorman is proud of his company’s gleaming new headquarters in sunny Bath – a testament to the company’s growing status in the wrap community, and to its commitment to the city he has made his home. And well he might be.
Only six years after starting the business – or rather, taking over a struggling Prudential/Egg project called Funds Direct – Ascentric has grown its investor funds under management by a factor of 100 to reach £3.4 billion. The days are long gone when Thorman and his colleagues had to fund Ascentric’s development by tapping their own friends and families for support: nowadays his 200 staff are effectively bankrolled by Royal London Group, which bought a 85% stake. But the company remains committed to inventive and often forthright thinking.
When Thorman appeared in September on IFA Magazine’s three-way televised interview with Alastair Conway from Cofunds and Danny Wynn, the Director of Platforms at Legal & General, he found himself fighting the wraps corner more or less single-handedly against a consensus that the FSA’s Platform Policy Statement (PS 11/9) had failed the IFA community by dragging its feet on the issue of banning cash rebates promptly. Not at all, he argued, the case for unit-based remuneration has not been proven at all – and the longer the FSA holds off, the better. We asked him to explain why.
Cash Versus Units
You seemed to be fighting a lone corner in the studio there. Can you expand a little?
“The great thing for us was that the FSA didn’t bring in the ban on cash rebates immediately. They didn’t bring it in because they didn’t yet know what the impact would be on client experience – which I expect to be very detrimental. That means that we can carry on operating our model.
“All of the true wraps currently operate with rebates from a fund manager. And I can’t see what’s so complicated about asking the IFA to explain to his customer that he’s getting a 1.5% annual management charge, of which 0.75% is rebated into his investment account. The client must then pay an explicit charge for the platform and to the adviser. As long as it’s clear to the client, what’s the problem?”
Is it perhaps that the FSA is looking for a completely unitary remuneration arrangement between the client and the IFA, because that would be simpler?
“I don’t know, but at the end of the day it simply changes the way that the client gets access to cheaper fund management. The trouble’s going to start when the extra element of the rebate to the client is paid in units rather than in cash. He’ll have dozens of little lumps of units coming into each of his accounts every month instead of cash, and it’ll all get very complicated.
“Not least, because each of those tiny units is going to generate a future CGT event of its own, and it’s going to create a lot of paperwork. HMRC for its part is going to want every little detail of those unit payments, in case it should happen to take the client over his own CGT exemption limit.
“And at the end of the year the client is going to have a gigantic report of all these silly little payments, and us having to tell him whether he’s created any CGT liabilities. And that in turn makes him more likely to have to use a tax adviser because now he’s got a CGT issue that he didn’t have before. The August Policy Statement really didn’t explain at all how this CGT issue was to be handled.”
Execution-Only Platforms
Moving on a little, I’m reading that some people believe the future belongs to direct-to-client platforms or execution-only platforms. And what about the competition from banks?
“Obviously, the vast majority of our sales are currently through IFAs, which is the way we like it. But the changing relationship between IFAs and their clients does mean that the demand for execution-only will grow after RDR. We have no intention of taking food from our IFAs’ mouths by encouraging the supply of full-on execution-only services direct to individual investors. But there’s scope for some form of execution-only through an IFA introduction for which the IFA gets paid a fee.
“Unlike one of our competitors, we’re not developing a B to C platform – instead, we’re developing it as a B to B to C, where the IFA is the customer’s gateway to the platform. You’ll go to your IFA and you’ll say, “look, I’m not happy with paying a large fee because my portfolio isn’t big enough to bear it”. And the IFA can point you toward a platform that gives you some basic guidance as to how to go about choosing an investment, and some sort of a tool that helps you establish your risk tolerance. And then it’ll say something like: “What you need is portfolio number three”, and you invest there and then with your debit card. What’s in it for the IFA here is an annual introduction fee.”
The Banks’ Next Move?
What are the chances that the banks will open up their own proprietary platforms?
“Well, if I were a bank I think that’s what I would be doing. And indeed, Lloyds have already come out and said that that’s their strategic intent. But at the moment they all find it terribly difficult to focus, because their balance sheets are in disarray, which isn’t very helpful at all.
“I think that, if they do decide to go ahead – and if they can’t or won’t afford to build these platforms themselves – there’s a good opportunity for us to supply them with platforms that they can use under licence. Filling in the gap between the wealth managers, which tend to be IFAs, and the private client stockbrokers, the gap is in B to B to C – which is exactly what we’re doing. Ours is much more comprehensive – not just funds, like one of our major competitors, but in the whole range of instruments including stocks and shares.
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“The bank’s opportunity is somewhere in the middle between these two extremes. If a client needs advice because he isn’t confident or selfdirected enough, but he can’t afford the advice from an IFA, then that’s a client who would only get into long-term savings with the help of a bank.
“Now, obviously, some of these banks are in a different market from IFAs anyway. Some of them, of course, are selling tied or multi-tied products. But they still need a platform.
“We do white labels, and we provide some of the bigger networks and distributors, and some of those are really restricted advisers, but that’s often what suits less affluent investors. For these people, the “whole of market” idea is much less helpful. The important question for them is probably: “Is everything in one place? Can I value it easily? And can I buy it for a reasonable price?” In this situation, it can work well if the intermediary makes the decision. Our job is to supply that system. And that’s what we’re keen to do.”
