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7 key issues you cannot duck when conducting platform due diligence

How do you know when placing clients’ assets on a platform that it will do what it says, it is cost effective for your clients (and your business) and it’s going to be around for the long term? Paul Boston, sales director, Novia outlines the seven questions he believes adviser firms must ask if they are to get the right platform for their clients and their business

Platform due diligence should start at the client level and a fundamental understanding of the client proposition you are choosing to offer to ones clients. Be mindful that the proposition (proposal) becomes a contract once the client starts to pay a fee.

The platform selected must aid the delivery of the client proposition/contract; therefore platform selection should not be undertaken as a singular piece of research but rather as an integral part of the investment, advice and administration process. Equally, as a relatively embryonic industry, research should be reviewed on a regular basis as the environment and providers continue to develop. In the past the undertaking of migrating assets from one business to another was full of administrative pit falls. However, with many providers now adopting the Origo Options System, the pain, cost and time involved in moving assets has been reduced.

1. What’s the investment process?

Any platform due diligence should be led by the investment strategies the adviser wishes to employ through their investment process, whether that be passive, active, discretionary or in-house models. A chosen platform must be able to facilitate the investment strategies and possible legacy assets. Access to cash accounts are often overlooked but may be a must for any a client in drawdown who doesn’t want to have to sell down in a volatile market. We are seeing more advisers looking to access a range of structured products as well. One then needs the platform to provide reports that deliver to the client proposition. For example it will be very difficult to provide an in-depth analysis of investment performance if the client has paid money in or taken withdrawals as this will mask true performance. In this event a money-weighted Internal rate of return valuation will be required.

2. What’s the range of tax wrappers (in-house and external)?

Once the investment strategy is agreed, consideration should be given to tax and tax wrappers. These tax wrappers can be offered by the platform itself and/or by third parties.

It is desirable that a gross nominee account is available so that gross eligible investors receive interest gross even if investment selected only provides access to net share classes. It would also be advantageous if the pension prefunds the tax relief, as this may result in 20% of the portfolio being out of the market for sometimes as much as eight weeks. It is desirable that the GIA investor has access to a CGT report that accounts for notional distributions on any accumulation units to prevent a client paying income and capital gains tax on the same investment. A significant number of CGT tools do not account for this.

Equally, EIS, VCTs and BPR qualifying investments are attracting more demand from advisers to be viewed on a platform, even if this is to be viewed as ‘non-platform’ assets.

These are many platform comparison sites to see which platform offers which tax wrapper. As a rule of thumb, select a platform with the ability to offer as many tax wrappers as possible through in-house offerings as well as links with external providers.

3. What are the costs? Beware the fixed charge.

Once you have found the platforms that facilitates the delivery of the client proposition/ contract, the question of  ‘how much will all this cost ?’ is next. Limiting costs is obviously a key factor in helping the client achieve superior returns.  These costs can be broken down into the charge for the investment, the platform, (initial and on-going), the tax wrapper and ‘trading’. The ‘trading’ cost is often a fixed price and is frequently overlooked by investors, the amount paid will depend on the turnover of each portfolio. Fixed costs whilst looking cheap have a disproportionate impact on smaller investors with £100 equating to 20bps on a £50k investment.

For this reason and assuming you have found a number of platforms that facilitate the delivery of the client proposition, it is often applicable to select more than one platform and investment strategy, depending on the client’s portfolio size and degree of investment sophistication.

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4. Is financial strength the same as commitment to the market?

No matter how much financial muscle a company has, it will only continue to support a platform if it is making money or can at least see light at the end of the funding tunnel. Two prominent companies have announced that they are looking to review (read offload?) their platform strategies. There have been many companies with huge balance sheets who have made similar decisions. The key question has to be is the platform making money? If not, am I confident that the financial backers have the strategy and appetite to see it through to profit? Bear in mind the platform needs to make money in order to invest in development to help keep both it’s proposition and that of the adviser client at the cutting edge in an environment that frequently changes.

5. Is the technology able to adapt to change (the pension freedoms litmus test)?

Good technology is vital for efficiency (helping to turn a profit on very thin margins). With old technology the providers have to paper over cracks and backfill by hiring more people. Old technology is all too often unable to handle the ever-changing environment we work in e.g. pension freedoms, and requires manual intervention to complete the process. Other platforms, whilst on the face of it are efficient, still require ‘front end’ paperwork to be completed, which can be arduous.

On the other hand, there will be some platform providers, new to the market who will have untested and as yet unproven new technology. With new technology comes glitches.

The art of accessing technology is to select a platform with technology that has a track record of adapting quickly to change.

6. How much support is provided?

Selecting a platform ultimately requires a leap of faith and will always be a learning curve. A high level of support is needed. It would be interesting to enquire how many support staff there are to each active adviser account, what the average response times are and what is their ability to employ manual intervention should the need arise, because at some stage it will.

7. Does the platform complement or compete?

I would be very reluctant to use any provider that wants to deal with clients directly. As an adviser you are giving a potential competitor client information. As a businessman this is a high risk and unnecessary strategy. I would choose a provider that complements my proposition and doesn’t have aspirations to compete with it.

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