It is no big secret that assets under administration on investment platforms is growing at a rate of knots; however recent research hints at an increasing propensity amongst investors to buy funds directly from the providers.
Civil servants may take this as positive news. Published in July 2012, the Government’s Kay Review of UK Equity Markets and Long-Term Decision Makingcommented on the problems of what it describes as “an explosion of intermediation” in the financial sector between company and saver/ investor. Problems include the additional costs incurred via a growing investment chain, and an undue focus on intermediaries at the expense of the primary aim of high-performing companies, and ultimately good returns for investors.
Us platform enthusiasts would temper these gripes with acknowledgement of the positives of buying funds on-platform, but I’m not going to get up on my soapbox today!
So what does the consumer research tell us about ‘going direct’ rather than using a platform to invest? In April 2013, financial research specialist Consensus conducted research with 280 ‘active’ end investors, i.e. those holding collective investment products with more than one provider and adding to these/ taking out new investments at least once a year. The chart below illustrates the distribution channels used by these investors to buy the funds they currently hold.
A quick ‘health warning’: the platform category refers to direct platform use, whether used independently of an adviser or signed up for with assistance from an adviser. It is pretty safe to assume that the IFA category entails use of adviser platforms in most cases.
We can see that the proportion of investors buying directly from the fund provider has increased by six percentage points over the last 12 months, while the proportion holding funds on D2C platforms has decreased by seven percentage points. Self-directed investors (those who take care of business without the help of an adviser) are especially likely to buy directly from a fund provider (61 per cent have done this for a currently-held investment).
Delving into demographics, under 45s are most likely to go direct (52 per cent) and least likely to use a platform (19 per cent); men are significantly more likely than women to go direct (53 per cent versus 43 per cent), with the fairer sex more likely to tread the advised path (24 per cent of women versus 18 per cent of men have bought via a bank/ building society adviser, and 37 per cent versus 34 per cent via an IFA).
Also indicative of this consumer shift away from intermediation is the data on how investors anticipate buying their next fund(s). Ask investors to rate their likelihood to use each distribution channel on a scale of 1-7, take the mean scores, and you can see the relative popularity of the channels overall. In the last six months, the likelihood to buy directly from the provider in future has increased to almost match likelihood to buy on a platform. Again, younger investors are more likely to go direct rather than use a platform.
Looking at the reasons investors give for expecting to invest in funds a certain way, ease/ convenience plays a huge role. Value for money is also a strong driver, with 36 per cent giving this as a reason for expecting to go directly to the fund provider; although a greater percentage, 49 per cent, anticipate using a platform because they think it will secure them a better deal.
Buying via a platform has one big advantage that buying directly from the fund provider does not – the most frequently-cited reason for buying a fund on-platform is to have all investments kept in one place.
The ‘directly from a provider’ channel has considerable plus points, but then so does the platform channel, which comes with the additional ‘one-stop shop’ convenience factor. There are also inhibitors to buying direct – the most mentioned being cost.
Historically it has been the case that buying a fund from the provider is more expensive than buying via a D2C (or adviser) platform. Yet as a number of platforms in the UK market struggle with profitability, and FCA regulation continues to shake up charging structures, the relative cost of using a platform could well change. And let’s not forget the ever-growing importance of brand. Hargreaves aside, there is relatively little consumer awareness of platform brands, whereas the big fund groups – especially those associated with a life company – are better known.