A few years ago, platforms were under major pressure to address the problems around fractional dealing, however, despite limited progress being made, there no longer appears to be the same pressure being applied by the UK investment industry.
Problems around fractional dealing have been a crucial stumbling block to the uptake of ETFs in the UK. Platforms that do not have fractional dealing force investors to buy or sell only full units of ETFs, creating an issue for retail clients with small portfolio sizes. This is most pertinent in the fixed income space where many issuers set the unit price at around £100.
Meanwhile, model portfolios cannot accurately replicate their holdings without fractional dealing meaning wealth managers have been discouraged from using ETFs – this issue has been highlighted by a number of respondents in ETF Stream’s Expert Investors series.
Big platforms, such as AJ Bell, Cofunds and Old Mutual Wealth, are yet to offer fractional dealing, and claim the demand is not currently there for ETFs. Some platforms have even called on ETF issuers to lower their unit prices.
However, ETF issuers argue demand is there, but the platforms do not want to pay for the technology required to implement fractional dealing.
Steps have been made by a few players however. In 2016, Nutmeg made headlines when it launched a fractional share dealing facility enabling clients to invest in ETFs to four decimal places while rival Winterflood Business Services followed in their footsteps a year later.
Ensuring all portfolios (of a certain risk level) are identically aligned is one of the key reasons for introducing the fractional share facility, according to James McManus, director of ETF research at Nutmeg.
“This means we do not need to wait to receive a certain value of dividends before we can reinvest capital for clients, and we are not forced to choose between re-investment and asset allocation,” McManus continued.
“Unlike many other discretionary managers, our portfolios do not change with wealth level. This is particularly important when dealing with lower portfolio values because it unlocks a greater degree of diversification for these clients, increases the time in the market as capital is re-invested quicker, provides a consistent asset allocation with tight risk controls, and it means product selection is unencumbered by issues with share prices.”
Problems around cost is the true reason why this is yet to occur on major platforms. For example, one industry commentator told ETF Stream Winterflood’s offer to do fractional dealing on platforms comes with requirements around custody of the assets.
This, they said, could add around a third onto the costs which would have to be passed on to the investor. “Given platform costs are coming down, it makes it very head for a platform to justify.”
That being said, barring a few players such as Novia Financial and robo-advisers, the platform industry continues to bury its head in the sand on the fractional dealing discussion which is slowing the uptake of ETFs and ultimately, impacting investors.