Why the benefits of platform pre-funding quickly add up
Pre-funding across a broad range of functionality will not only benefit an adviser firm’s clients but it upholds the underlying principles of treating customers fairly, argues Alistair Wilson, head of retail platform strategy at Zurich
With online banking very much the norm for many, it is understandable that clients expect the same access to their money when managing their investments via a chosen platform.
With all the technology currently available at our fingertips, it seems crazy that money takes so long to move from one place to another when it comes to investing. In a perfect world there would be no delay between giving an instruction and it being carried out.
The groundswell of adviser opinion we’re seeing supports what forward-thinking platform providers and leading lights in our profession already recognise: the benefits offered by pre-funding (when platforms are prepared to invest funds that have not yet cleared on behalf of clients) quickly add up.
3 days investing
Pre-funding means you can start trading the day you move money across. For companies that don’t pre-fund, typically you’d have to wait around three working days.
By not having to wait for those three extra days, a £50,000 investment would gain around £29 more in the first year* – not a fortune, but better in your clients’ pocket than anyone else’s.
4 days switching
While you may recommend switching funds regularly to ensure your clients’ portfolios stay in line with their agreed investment strategy, most platforms don’t instantly clear switches.
In a perfect world there would be no delay between giving an instruction and it being carried out.
While the length of this process varies, four working days is typical for the sale of the existing fund to be completed before buying the new fund.
Selecting a platform that supports pre-funding on switches means the new fund can be purchased as soon as the sale of the existing fund has been made – cutting the wait usually to within one working day.
This means a £250,000 fund sale and purchase would be worth £144 more to a £500,000 portfolio just by being in the market for those three extra days*.
5 days taking pensions benefits
When your clients decide to take their pension benefits, such as a tax-free lump sum, a platform offering pre-funding can make their money available as soon as the value has been confirmed by the fund manager.
This could be up to five days quicker than platforms that insist on waiting for the investments to be sold and the funds to clear.
48 to 78 days getting pensions tax relief
This is a big one. When clients pay into a pension net of tax, it can take 48 to 78 days (six to 11 weeks) before a platform actually receives the tax relief from Her Majesty’s revenue & customs (HMRC).
Selecting a platform that uses pre- funding to credit the tax relief as soon as the contribution is made net of tax can make a big difference. For example, if your client made a contribution of £32,000 net on 5 March they’d be in line for tax relief of £8,000 (or more if they are a higher rate taxpayer), bringing it up to £40,000.
Where the tax relief is funded immediately, the full £40,000 is invested straight away. This could add £121.20 in investment growth to the end of that calendar year compared to a platform which invests only the £32,000 on 5 March and then waits until HMRC pays the relief to invest the extra £8,000, which would be on or around 22 May based on a fair assumption.
Project that forward over an additional, say, 20 years, then that £121.20 turns into £489.50 extra in your clients’ pension pot*.
Of course, if markets had risen faster, pre-funding would make even more difference. If they’d risen more slowly or fallen, the picture would be different again.
5 days withdrawing money
Let’s face it, it’s your clients’ money; they want it when they want it.
Selecting a platform that offers pre-funding helps ensure this happens. It can also avoid the additional five-day wait facing many clients on platforms that do not support pre-funding.
Platforms need to enable advisers to react quickly to changing markets.
Those that don’t pre-fund trades and await settlement before allowing clients to buy new funds can lead to missed opportunities for advisers or, at the very least, slow the transaction process down.
Granted, rapidly changing markets can sometimes mean that clients may be better off with their money stuck in limbo rather than invested, but faster access through pre-funding can and does make a positive difference over the long term.
Time well spent
It’s clear that across the market there is a wide range of pre-funding options available on different platforms, so time spent drilling into the detail will categorically prove to be time well spent.
Ensuring your platform of choice supports pre-funding across a broad range of functionality will not only benefit your clients, but will uphold the underlying principles of treating customers fairly, and actively support the level of service you pride yourself on delivering and which your clients demand.
First published in Zurich’s Advice Matters