Al Ward discusses why The Aviva Platform doesn’t take a margin on cash interest
Al Ward, Head of Adviser Platform at Aviva, recently wrote for Citywire about the platform cash debate. We've republished the article in its entirety here.
As the Bank of England continues to hike interest rates, chancellor Jeremy Hunt has accused high street banks of being slow to raise savings rates, particularly on instant access accounts. And according to a recent BBC article, the difference between cash and the margin on mortgages has increased by 1.7 percentage points. We have seen similar elsewhere, leading to growing profits.
Theoretically, a current account provides access to cash that is needed now and is not for longer-term money, which can earn a better return elsewhere.
This is also true of investment platforms.
In an ideal world, all clients would be 100% invested all the time, with auto-disinvestment used to facilitate payments. Cash interest wouldn’t then matter so much. But things don’t work as seamlessly as that and there are side effects of being fully invested. We live in interesting economic times and with a base rate of 5%, cash is likely to be outperforming some equity-based investments. Customers are naturally attracted to the security and comfort of cash, even though traditional investment theory would have us investing to keep pace with inflation, if nothing else.
Let’s cut to the chase though. Platforms aren’t banks, they don’t offer commoditised transaction capability (for free), and managing cash on platforms takes little effort if structured correctly. This challenges the view that managing cash to generate better, but not always leading, returns is costly and warrants receiving material reward for doing so.
And then there’s the platform fee charged on top – something banks don’t have. This all starts to feel a bit like tax, where every action has a charge, explicit or not, and gradually the returns are whittled away in the background.
A quick fag packet calculation shows that retained margin could equate to an extra charge of two basis points (bps) to the customer for a £150,000 portfolio holding 2% in cash. I suspect in some cases this could be higher (although that depends on individual arrangements). While 2bps isn’t massive in the grand scheme of things, in a market where returns are muted and value is a hot topic, I do wonder what the regulator thinks of it all.
Let’s be clear that the FCA is not here to stop us from making a profit. But if we look at regulatory changes over the years, the direction of travel has been one of transparency. It could be argued that taking a margin on cash lets advisers and customers know what is being retained and is therefore transparent. However, trying to work this out is a minefield. Credit where it’s due – some do disclose this as a charge. Others don’t and you have to dig around in websites, understand who their banking partners are (some wouldn’t pass our due diligence), then get the calculator out.
A platform provides access to a multitude of products, whether they’re tax wrappers, investment components or solutions. Everyone knows there is a platform/product charge that covers the cost of adding, overseeing and generally administering these. Why should cash be any different? We don’t charge for adding a fund and we accept revenue will be generated from the assets placed in it.
To be clear, I don’t have a problem with anyone covering their costs and making a profit but is it fair to retain a margin on cash? That raises three questions:
- How much work is it to generate higher cash rates?
- What does the platform charge on cash actually cover?
- How much is the cash margin and what is a reasonable level of profit?
Now let’s imagine a portfolio manager had a (not very transparent) fee of 1% or more on top of the total expense ratio.
Just in case you were wondering, Aviva’s Adviser Platform doesn’t retain any interest on cash paid, discloses its banking partners and passes it all (currently 4.2%) on to customers.