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There is a clip on YouTube (no, not the Boycie piano piece) it’s from the 2009 Sasquash Music festival, you can watch it below. It’s often used to demonstrate the formation of a movement, the role of leadership and crowd behaviour. Basically a concert goer decides that he no longer want to just sit with the audience and consume the gig passively, he decides he wants to dance, and dance he does. For a while he is the only one dancing and his choice of expression (from the ‘dad-dance’ genre) attracts some mockery from the sitting masses. And then a funny thing happens, a second guy joins the crazy dancer. Suddenly the crazy dancer doesn’t seem quite so … crazy. Two people dancing suggests there is fun to be had. Suddenly those sitting and mocking aren’t so cool, it’s a gig, the dancing guys seem to be having fun. So they are joined by a third, and a fourth dancer. By the end of the clip the whole damn place is dancing like it’s 1999 (bar a couple of old timers who’s knees have clearly gone. They’d love to dance, but that just isn’t going to happen).
And that, in a nutshell, was how we felt up in Dundee last week. We’ve been dancing alone on that hill for many years and yet, suddenly, a Dutch fella took his shoes off and decided to join us with flat platform fees. Okay. He isn’t actually dancing yet but he made his intentions known. Next year he’ll be up there dropping some shapes right beside us. It felt good, it validated us in many ways and in a few years, in our opinion, it won’t just be Alliance Trust Savings and Aegon burning up the dance floor, it’ll be pretty much every UK platform. Dodgy knees excluded.
Flat fees are a fairly misunderstood concept. Ask anyone what flat fees represent and they’ll have ‘cheap’ fairly high on their list. It’s an interesting connection, obviously the higher value a portfolio the lower the cost. Our admin often runs in at an equivalent of 5bps or lower, but it’s only part of the story. Put a £10k ISA portfolio against a flat fee and you are looking at 150bp which isn’t cheap anywhere, last time I checked. The point however is not price, it’s the principle. You pay the providers costs and a fixed margin, you decide if that offers you, and your clients, value. Start looking at flat fee platform admin against a good client bank and the discounts are impressive. Your first though, ‘that’s not sustainable’, and PING goes the Stephen Fry QI klaxon…
Flat fees, quite simply, are the fairest and most sustainable model in the platform market. As soon as the requirement for cross subsidisation of client administration is removed you have a fundamentally sustainable model in place, both for the client AND the provider. A platform has a cost associated with the services it provides, however (unlike investment products, and unlike a planning relationship) this cost is not associated with the value of the client. An administrator will service the account, a statement will be sent, a website will be supported, underlying license fees will be paid. And yet none of these will be higher or lower if the cheque that opened the account is for £10k or £1m.
Instead of questioning how sustainable it is do it, profitably, at £150 (to use ATS as an example), the question is how do you manage that annually, at profit, on a £10k client who is only paying 25bps. And of course the answer is, you don’t. Hence the profit margins that dominate the market are so slim/non existent. It ‘works’ on the premise that the 8 clients that come in under the real cost of their admin will be aided by 2 or 3 big portfolios, that will pay hundreds, if not thousands for the same service. Yep, your best clients are picking up the bill for everyone else, very kind of them isn’t it.
So how will it pan out. We suspect the flat fee movement will grow, it just makes too much sense not to. Whether that’s via headline rates or simply IFA’s demanding from their providers (behind closed doors) that they access a flat rate to avoid the cross subsidy issue. Platform models would make Robin Hood proud and that’s fine for the smaller portfolios. If someone is willing to do your admin at less than cost then go for it, just make sure it isn’t YOUR best clients covering the bill. You can dress it up and shine it till you see your face in the reflection but we think it’s starting to go the other way, strip down a platform to the true value it offers your clients and you are staring at an administration and custodian service, pure and simple.
If you want to access to video clips of other IFA’s talking admin, or whatever this weeks gizmo might be then that’s fine, help yourself. Maybe that’s what your clients value. However, don’t ignore the music. And well done Aegon, welcome to the party.
Remember to keep your eyes on the 2 dancing guys, you’ll be up on your feet sooner than you imagine!
For professional advisers only. Investments can go down as well as up. Investors may get back less than they originally invested.