Investors lose most from platforms feud

Investors are losing out because some of the investment management industry’s best funds are struggling to get on the major platforms, say IFAs.

The issue is affecting the smaller asset managers such as Unicorn, Chelverton and Slater Investments who run portfolios invested predominantly in small-cap equities. In many cases, the funds run by these firms are leading their sectors but the houses struggle to meet the fees asked by the platforms or prove that there is demand for the fund.

“It must be very frustrating from an investors’ point of view to know that there are some great funds out there but they are not offered by your chosen platform,” says Rob Morgan, investment analyst at Hargreaves Lansdown.

“Platforms connected to the larger firms in the fund management industry may have a conflict of interest at the heart of why they don’t carry a particular fund,” he adds. “Ultimately investors need to be careful when they choose a fund supermarket to make sure they get a full cross-section because there are some really good funds from smaller, boutique houses that are leading their sectors but are struggling to get on the platforms.”

Darius McDermott, managing director at Chelsea Financial, says that he has been frustrated he has not been able to buy Unicorn UK Income on his chosen platform.

“You’ve got to really feel for the smaller houses that are running money in the right way. They don’t have big sales teams and can’t cover IFAs all over the country. We’ve been asking to get Unicorn’s John McClure onto the platforms for some time now. His performance is strong and he has been focussing on a very different end of the market. It’s about time the platforms got their act together.”

Unicorn themselves say that to compete with the marketing budgets of the larger houses they need to be on the platforms but they are not prepared to pay what they deem to be an unfair price.

“Fund supermarkets are really hindering the small asset managers,” says Myri Prior, client services manager at Unicorn. “Some platforms want as much as 60 per cent of the annual management charge and in some instances that figure goes up as you gather more assets, not down as you might expect.”

“Something like 45 per cent of new business to funds comes from the platforms so, from a business perspective, you have to be on them but the costs are unsustainable for smaller firms.”

However, Graham Bentley, head of proposition at fund supermarket Skandia defends the process that platforms go through in selecting funds for inclusion. He says that investors would end up having to pay more if they didn’t have a stringent process and in some instances, funds are often too small to be added because it issues of liquidity would arise.

“We can’t add funds unless we are sure there is going to be demand,” he says. “If we put absolutely everything on then it’d cost us more to have a very long tail that wasn’t being used. If a very large IFA asks for a fund and proves that there is demand then we take that very seriously.”

“At the opposite end, if a small fund is being sold through a life policy there is the danger that we can become the single biggest investor which creates liquidity issues if an IFA wants to pull out,” he added.

At the moment a very small number of the platforms are actually turning a profit and the RDR is likely to make life even harder.

“After 2013 the problem people perceive with rebate will not be an issue,” says Bentley. “It will cease to be a stream of revenue. If we offer lower rates to smaller asset managers because they struggle to meet the costs then this is unfair on larger houses who struggle to compete in small markets where IFAs generally opt to back boutiques.”

“We feel that platforms that don’t follow through a diligence process and simply place everybody on the list are failing in their duty of care to make sure the products are appropriate.”