Understanding Financial Investment Platforms, Part One
Financial platforms are increasingly popular, but before you sign up for one, it’s important to know how they work and the different types that exist.
I’ve talked about platforms before, and if you’d like more detailed information, you can check out two podcast episodes here and here, but I hope that these two blogs will give you enough advice so you’ll have everything you need to know and do to invest via by a platform yourself.
What is a platform?
The first thing to get your head around is that a ‘platform’ is really just an admin system for money. 20+ years ago, certainly in the UK, if you wanted to buy a fund by Jupiter or Invesco, you’d fill out an application form, write a cheque, and they’d look after your money – you went directly to the fund house.
Then someone came up with the idea of a fund supermarket, which works the same way as a food supermarket. They do deals with lots of different fund houses, and the consumer has access to all of these under one roof.
A supermarket does a deal with the wholesaler and uses their economies of scale to offer food at a lower price than you could by going direct. The fund supermarket works in the same way – they would come to a deal with the fund manager and it wouldn’t cost you any more to invest with a fund manager by a supermarket, because built into the annual charge was a kickback, a rebate paid to the supermarket, but through the back door.
This method, of course, doesn’t fit with today’s transparent way of doing things. The first platform took the supermarket model further, so not only can you get access to different fund managers, but you can access different tax wrappers too. That means you can hold a pension, and ISA, a GIA and maybe onshore and offshore bonds all on one admin system.
A platform is not a product
In my opinion, a platform is not a financial product as such, although not everyone agrees with me. It allows you to move money between accounts and switch funds, to rebalance your funds, withdraw or add money and invest a pension.
It’s not a product in the way that a SIPP or life insurance product might be, where there are lots of qualitative differences between them, a platform is more of a system. The problem, however, is that the regulator is only just coming round to that fact.
How to choose between platforms
The second thing you need to know is that consequently, there is very little to choose between most platforms. So, if they ARE just admin systems, how do you choose between them? They all offer pretty much the same types of accounts and choice of funds, so they may try to differentiate themselves by offering planning tools, off-the-shelf portfolios that they’ve put together for you, or special offers at the tax year end.
Ultimately, these are just bells and whistles, and I don’t think they add much to the platforms. Most people just want some way to make managing their finances easier. I think it comes down to cost to you, the user, and to the profitability of the platform. Will it still be there in five years and is it making money?
After we’ve covered those things, choosing between the platforms is very subjective. You may consider if you like the look of the website and if it’s easy to find what you need there? Most platforms will have a demo so you can have a look about, but it may just come down to the visual appeal of the site.
In the next two posts, we’ll be looking in more detail what the platforms options are.