The terms of reference for the platform market study makes it clear that platforms are an increasingly important part of the retail distribution landscape with assets under administration estimated to have grown from ¬£108bn in 2008 to ¬£592bn last year.
It adds that within that direct to consumer platforms are an increasingly important way for the consumer to access retail investment products.
Among the issues the review will investigate and the barriers to entry and expansion. Specifically, the review will look into:
- Whether large platforms benefit from economies of scale which smaller firms and new entrants struggle to match
- Whether third-party technology providers make entry and expansion easier or harder
- Whether platforms face a competitive disadvantage when competing for investors because of regulation
"If the result of the study is to create a more competitive market where new entrants and innovators are able to compete more easily then it's probably good news for robos," he adds.
French points out that the advice gap created in the wake of the Retail Distribution Review (RDR) meant that many investors with limited funds to invest were left without an obvious platform with which to place their money - and that robo-advisors and discretionary wealth managers such as Scaleable Capital have rushed to fill the gap.
"We are thrilled that the FCA recognises that we are part of the solution to get people invested," he says. "With the platform review focusing on removing barriers to entry and creating a more competitive market this can only be good news for investors. We really appreciate the efforts the FCA is making to create a supportive regulatory environment which will help us service the needs of UK consumers."
The FCA terms of reference said that platforms are increasingly competing by designing and promoting investment solutions such as model portfolios, which is a key area for robo-advisers. The FCA noted that these solutions have the potential to "simplify the investment process" via automation of the assessment of risk tolerance and risk profile.
Hence, the FCA continued to add that a significant degree of IT investment and infrastructure costs were likely to be incurred in order to reach the necessary scale. French believes that technological innovation lies behind the rise of a new breed of investment managers, allowing online offerings to take into account various factors before steering clients towards a portfolio "which is suitable for their goals."
Richard Flax, chief investment officer at Moneyfarm, agrees that technology is useful tool for the online wealth managers but adds that there needs to be the "right parameters for that technology to be most effective."
"Over time, history tells us that there is scope for technology to reduce the overall costs for the industry but you still have to harness that in a way that fulfils the requirements of the regulator in terms of the quality of what's on offer."
Cost controlBarriers to entry are one factor of interest for the FCA and another - equally important - area of concern, particularly when it comes to robo-advisers, is the "competitive outcome" and how platforms compete not just on price but also on quality of services and on value for money.
"The underlying focus is ensuring the best consumer outcome," says Flax. While in financial services guaranteeing an outcome is "very difficult", where a platform does have some element of control is costs.
"It's important to look at an outcome that is net of all the fees and charge - platform fees and fund fees and everything else that goes in there," he says. "There is a gross return and a net return and part of what the robo-advice sector is doing is trying to shrink the gap between gross and net."
Similarly banging the drum on fees is IG Group which has moved into the low-cost wealth management space in partnership with leading ETF provider BlackRock. It's head of UK and Ireland Ian Peacock said the company welcomed the call from the FCA for greater transparency on fees.
"Hidden charges have been materially eating into investment returns for years," he says. "Being upfront about charges, allowing investors to see their total cost of ownership, will inevitably lead to fee savings overall, meaning a greater portion of an investor's returns can be reinvested, generating further earnings."
He adds that he believes the asset management sector had been slow to react to the pressure form the regulator in this regard. "We have long held the view that many wealth management providers fall short when it comes to fee transparency, leaving investors in the dark about the true cost of investing and the impact it will have on their returns."
A total returnFlax points out that the FCA makes it clear the body is concerning itself with investigating eventual outcomes and not just costs. "At the end of the day, a low-cost product that generates a very poor gross return is not going to help the consumer. So at some level it's about the net return over time."
Similar to other robo-advice providers, Moneyfarm translates a consumer's goals into one of six different risk levels and they are translated into different portfolios of ETFs which the company thinks are suitable for those risk levels. He says that though technology can address a lot of concerns" at some point it won't be just a discussion about costs.
"It will be tied to the actual service and product we are providing," he says. "What hopefully it will do is to provide a very high-quality product. It will enable providers to bring down the minimum investment with less emphasis on what they need to start with. It's about making it more accessible. Giving people more options that are robust solution to their long-term hopes for saving and investing."
French says that the rise of passive investment presents some platform providers with a "big challenge."
"With vertical integration between a platform and an active asset manager, the role of the platform has changed from being a facilitator/order taker, to a sales channel enabling flows into the in-house funds," he says. "With demands for passive funds on the rise this model is looking increasingly challenged."
The FCA hopes to publish the findings from the market study in the summer of next year.