RDR raises questions for family office market

The initials RDR (Retail Distribution Review ) may send shivers down the spine, but with the Financial Services Authority (FSA) preparing its final pronouncements for the platform regime in the UK, the wealth management market is bracing itself for a fresh round of business model adjustments.

The consultation process on the platform regime that will come into force in 2014 has the dual objectives of enhancing competition and transparency for customers in the future. As a consequence, the consultation has been a defining moment – quite literally – in the evolution of the UK platform market.

For, at the heart of the consultation, the FSA has defined a platform service as one which both distributes retail investment products and is also involved in the arranging, safeguarding and administering of assets.

This definition, combining product distribution with administration and safeguarding functions, has posed a new question for specialist investment service providers: are they, or are they not, platform services?

Nowhere is this question more pertinent than in the UK’s burgeoning family office market, which positively thrives on its ability to separate the process of selecting investment and wealth protection products from the functions of administering, safeguarding, accounting and reporting.

To date, the job of investment services providers that support family offices has been to streamline the management process for single and multi-family offices (MFOs). This gives them a single view of their holdings, across multiple clients or family members, across multiple custodians and, indeed, across multiple platforms, while remaining product agnostic.

Flexibility

Going forward, most MFOs already have RDR-compliant business models, with clean fees and no reliance on rebates, as portfolios are typically invested in institutional share classes rather than mainstream investment products.

However, they will still need to be able to deliver the required flexibility around unbundled charges, for example where the family holds assets in SIPPs (self invested personal pensions) or has fund-based investments. Inevitably, the challenge of managing client fees is more difficult on complex multi-asset portfolios.

Tracking data relating to client suitability is also particularly important for MFO providers, given their client portfolios are often highly diversified in a range of institutional investments. Again, the ability to access information and present it cleanly for regulatory purposes is crucial for those dealing with ultra-high-net-worth clients.

So, the ability to provide complex administration and accounting services to families that hold a wide range of assets and asset classes is already a highly specialised task and will simply become more so post-RDR. As a consequence, investment services will need to be much more specialised in this sector of the market in comparison to the mainstream.

Interestingly, the review has forced different players in the market to consider in depth their value proposition to end clients. That inevitably means more specialisation.

By levelling the playing field on pricing, mainstream platform providers (under the new definition) will inevitably need to differentiate their services more proactively. And as mainstream platforms gear up for greater competition, other providers of investment services will also have to consider their positioning in the changing landscape and the value they can add to the various types of wealth manager. We may also see more specialist investment services firms emerge.

Open the debate

One such firm with a focus on the investment services needs of family offices is Multrees Investor Services. The firm’s chief executive, Chris Fisher, welcomes the platform consultation for creating clarity around what is meant by the term “platform” and opening a debate about how technology, people and process can best be used to support the needs of different business models in wealth management.

In his words: “The word ‘platform’ has always had strong connotations around IT. It makes you think of a system or product distributor, rather than a service architecture. But, if you add people and process and expertise around the platform, then you have a service.”

This process of definition is crucial. In the short term, we can expect this latest round of consultation to result in confusion and a shakeout in the so-called platform market. Longer-term though, it will almost certainly have its merits by creating a clear separation of providers in mass distribution, from those delivering highly specialised capabilities to support the needs of different kinds of wealth management providers.

Catherine Tillotson is managing partner at wealth management think-tank Scorpio Partnership