Investment platforms: making an informed choice
A first survey of the platforms used by millions of savers provides valuable comparisons but needs industry buy-in
As investors we should know a lot about the platforms through which we funnel large portions of our personal wealth.
The problem is that many linked investment service providers — set up to counter black-box investments from life assurers — may be more opaque than we’d like to think.
That point was driven home recently by the first survey of investment platforms, compiled by The Collaborative Exchange.
These platforms are used by millions of investors in retirement annuities, umbrella funds, living annuities and tax-free savings accounts and the survey was aimed at providing financial advisers with a fair comparison. But only six of close to 20 investment platforms operating in the market agreed to participate.
While the six that provided their details hold 71% of the R1.2-trillion local investors have invested through these platforms, the failure of the others to disclose their information leaves advisers and direct investors without much insight into even all the major players.
The Collaborative Exchange founder and director Kevin Hinton says he was surprised that more platforms did not take part, because the reason the linked investment service provider industry was founded in the 1990s was to provide an alternative to the life industry’s lack of transparency about its investment policies.
Among the big names that chose not to participate are Investec, PSG, Stanlib and Discovery.
Daryll Welsh, head of Investec’s platform business, says it prefers to have direct conversations with independent advisory practices in which more complex and technical questions can be addressed.
Emile Wegner, head of PSG Wealth’s platform, says the platform is focused on PSG advisers and has chosen to wait until it has broadened its services and the survey is more established.
Craig Sher, GM of Discovery Invest, says the survey included information it would typically not disclose to competitors and as others were not participating, Discovery did not see a strong reason to be a part of it.
The CEO of Stanlib’s platform, Mickey Gambale, said as Stanlib is currently investing heavily in its lisp technology, it felt its answers would be out of date shortly after publication of the survey. Gambale said Stanlib believes in transparency, is currently repricing the platform to a simple and transparent pricing structure and will be happy to participate in the survey from 2020.
Brandon Zietsman, CEO of PortfolioMetrix, says it’s a pity that many providers did not participate as advisers do not always have the resources, or the access to key people, to do their own research on platforms.
PortfolioMetrix, as a discretionary investment manager that constructs portfolios for financial advisers, does its own due diligence on platforms, he says.
Some providers told Hinton their platforms are available only to their tied advisers or agents, but investors should be able to compare the services, fund and product ranges, the platform structure and the fees paid on the platforms through which they are invested with those available in the market.
This is key for investors looking to compare fees.
It’s not uncommon for investors who use tied advisers to end up paying total fees in excess of 4% of their investments annually in administration, asset management and advice charges when the tied adviser makes use of an investment platform and funds offered by the company that employs them.
Zietsman says administration fees paid to invest through a platform are a grudge purchase, but the service is critical because investors know their funds are properly administered and there is good reporting for tax purposes.
The Collaborative Exchange’s survey shows that investors currently pay on average about 0.32% to 0.35% in annual fees to make use of these platforms.
Fees are typically charged on a sliding scale based on the amount you invest: smaller investors with R1m or less invested pay in the order of 0.58% of their investments while those with amounts of R10m or more pay less than 0.2%, the survey shows.
Hinton says the survey shows there is "clustering" on fees and no provider is substantially cheaper than any other, which seems to indicate that the industry lacks significant pricing competition.
As an investor using a platform you should expect lower fees on the funds in which you invest than if you invested directly, because asset managers receive bulked investments through the platforms. These reduced asset management fees should offset some or all of your platform fee.
The fees you pay for your funds also depend on the fee class offered to you, and this may depend on whether you are invested through an adviser or not, and which adviser you use.
Investors in platforms are free to switch platforms but the survey reveals that some platforms, notably Old Mutual among those that responded to the survey, charge exit fees if you move all your investments. You cannot withdraw from an RA before age 55, but you can move to an RA on another platform through what is known as a section 14 transfer (under the Pension Funds Act).
The fees charged by platform providers, asset managers and financial advisers are all under pressure and likely to decline in future — especially considering how much lower fees are in the UK and Europe. PortfolioMetrix uses a platform in the UK that charges just 0.15%.
Zietsman argues that the industry is ripe for disruption as technology enables new players to introduce more cost-effective systems; within a decade fees will probably be below 0.1%, he says. A number of existing platforms, many of which are already only just profitable, may disappear, he adds.
As part of the survey, The Collaborative Exchange asked providers about the growth of the amounts invested on platforms over the past three years.
Zietsman says it’s important to know that the platform you use is growing because fees are under pressure and platforms are low-margin businesses. Two of the platforms which participated, Glacier and Momentum, declined to answer, suggesting that growth has not been material.
The survey shows that some platforms offer investors access to a wide range of funds, while others offer smaller ranges.
All platforms surveyed said they conducted due diligences on funds before listing them.
While discretionary investment managers and more sophisticated investment advisers will look for what is known as open architecture that allows the platform to add any fund, individual investors may be happy to have a less confusing choice of selected funds.
Some platforms, like the Allan Gray platform, offer investors access to independent fund ratings to guide them as to how well the funds score on measures such as performance, ability to stick to their stated investment philosophy and fees.
Others, like Absa, Glacier, Momentum and Old Mutual, put what they regard as the best funds on a buying list based on their own internal research, but it may be difficult to discern any bias they have to their funds offered by asset managers within their group. Old Mutual, for example, only has its own funds on its buy list while only just over 11% of the funds on Absa’s platform are in-house funds.
If you are looking for lower-cost investments, you may seek out a platform that offers investments in passively managed exchange traded funds (ETFs). Some platforms do not offer ETFs but may, like Allan Gray, offer select passively managed unit trust funds.
More sophisticated investors may be interested in platforms that offer direct share investments, hedge funds or even private equity investments. The survey reveals that some platforms charge more for these investments.
The first survey of investment platforms, compiled by Hinton and Hugh Napier, could have been a much more powerful tool for advisers and consumers if all providers had participated. But that doesn’t mean you can’t ask them tough questions before you commit your money.
What is an investment platform?
Investment platforms offer you a choice of underlying unit trust funds — and sometimes a choice of other investments such as exchange traded funds, listed shares or even private equity funds.
This means you can invest in a platform from Glacier (in the Sanlam group) but buy unit trust funds from Allan Gray, Foord and Coronation.
Platforms disclose the fees and performance of your investment choices, and enable you to switch easily between the underlying investments. In the UK, platforms are known as fund supermarkets.
There are more than 3.6-million accounts set up on SA investment platforms and most investors with retirement annuities, living annuities, umbrella pension funds or tax-free savings accounts that offer investment choice from a range of underlying unit trusts make use of an investment platform.
You can expect to receive a regular statement of your entire portfolio on the platform, making it easier to keep track of issues such as your overall asset allocation and capital gains.
Investment platforms are also popular with financial advisers who use discretionary fund managers (DFMs) or discretionary investment managers, as well as those who manage portfolios for groups of clients through what are known as wrap funds.
DFMs will run a number of portfolios on a platform for the clients of the advisers who use them. When the DFMs decide to change the asset allocation or managers managing parts of the portfolio, they can do so easily through single instructions to the platforms.
Platforms typically offer discounted fees to DFMs and advisers whose clients collectively have a large amount invested through the platform. However, this has led to a proliferation of fee classes for each unit trust fund. As an investor you may struggle to determine if you or your adviser pay the lowest fees, so before committing, check the fees you’re paying for the platform, your fund and your adviser.