Use your platform to help create client wealth
A platform can positively impact a client’s investment returns if it allows you to avoid the tax traps, says Paul Boston, director of sales, Novia
As an industry we in the platform world have developed a very unhealthy focus on price, often debating about a few basis points here and there. I believe this has been driven by a constant and consistent message from commentators who largely believe that wraps are commoditised and that all the benefits of a wrap are focussed on the adviser with the client having to pay for these; hence ‘cheapest is the best’.
That people believe price is important is very reassuring from an ethical perspective. An IFA might, quite rightly, consider that the amount charged impacts on their client returns and they want to achieve the best possible return for their clients from the investment decisions that are made. But there is much more to it than that. Sure if everyone in the value chain charged less, the asset manager, the platform and the adviser, then on the face of it the client would achieve better returns – if everyone gave the same service for a lower price but, of course, that doesn’t happen.
So the question really is what is more important? How much a client is charged or how much return they achieve? These are most certainly not correlated and ultimately return is what matters.
Focus on tax as a charge
Clearly, investment performance is uncertain. What is much more certain is the entities that apply charges to the client’s portfolio, and there are many, and the levels of those charges; hence the reason for this focus. It clearly makes sense to focus one’s efforts in the area that will generate the most significant improvement in investor return.
So what are the parties that impact on an investor’s return? The adviser, the platform provider, the DFM, the fund manager and perhaps the most important of all and often overlooked – but potentially having by far the biggest slice of the cake – the tax man. All apply charges of differing degrees. In fact the FSA (as was) laid down firm guidelines that we should look at tax as a charge and take this into consideration when advising.
As we all know the charges (tax) levied by the tax man are always in the 000’s bps whereas the other entities are in the 10’s bps so if we are serious about achieving better returns for the clients surely it makes sense to start looking at the difference we can make to the tax charge first and what platforms deliver to mitigate this charge.
Functionality to mitigate the tax charge
A quick look will show that platforms can and do offer very different levels of functionality in this regard. Here are a few pertinent questions to ask:
* Does the platform offer sophisticated Management Information at the touch of a button that enables the adviser to utilise their client’s full CGT allowance each year? Figures clearly vary depending on client circumstances but to not do so can be roughly translated to an extra 100bps of unnecessary annual charge.
* Does the platform differentiate notional distributions payable on accumulation units when calculating the CGT liability? If not there is a high chance that the client is correctly paying income tax and then when selling the shares incorrectly paying capital gains tax on the investment without taking into account the reinvested income. That is a potential 2800bps of an unnecessary charge. We recently saw one example where the rolled up income (notional distribution) had increased an asset of £250k by a further £44.3k over 3.5 years. That is potentially 28% on £44.3k
* Are your clients in clean share classes or retail share classes? To be in the latter is likely to be costing a higher rate tax payer across a broad spread of assets an unnecessary 26bps if the funds are not held in a tax wrapper. Where the adviser is converting on a client by client basis dual pricing can apply with regular examples of a 2% spread.
* Does your platform/SIPP provider prefund pension tax relief? To not do so creates an unnecessary drag on returns. This has the effect of negatively impacting annual returns of 6% by 90bps in the first year. Looked at another way this is a 90bps initial charge which would be enough to ‘black ball’ it for most advisers.
* Does your wrap guarantee that gross eligible investors (SSIPs, SSASs, offshore bonds, corporates) receive interest gross regardless of share class? If it doesn’t there is a high chance that clients will be paying across a broad spread of assets an unnecessary 30 plus bps of tax charge.
Avoid the tax traps
The miracle of compounding returns can be overwhelmed by the tyranny of compounding costs and the tax man has by far the highest charges. To adopt an administration system that fails to avoid these tax traps can easily create a significant and unnecessary drag on returns for the unwary.
None of the features mentioned above come for free, but paying a few extra basis points for an administration service that has been carefully thought through to deliver a focused service, including tax implications, can save many 000’s basis points ‘charges’ but with a different label. Very clearly it is dangerous to look solely at price.
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