New research finds significant increase in 'orphan' clients in investment platforms
The number of orphan clients on investment adviser platforms has significantly increased in the last year, according to new research from Alpha FMC (Alpha), a specialist in asset and wealth management consulting.
Orphan clients are individuals with assets held on platforms, but who no longer have a financial adviser.
The research, based on a survey of six small and large UK adviser platforms, representing more than GBP260 billion of assets under administration, found that the number of orphan clients grew by 23 per cent year-on-year in 2020. This continued increase means the number of orphan clients on adviser platforms has risen by a substantial 185 per cent from four years ago.
The proportion of the assets owned by orphaned clients has also increased significantly. In 2020, an average of 1.7 per cent of the total assets under administration on adviser platforms belonged to orphan clients. Back in 2017, orphan clients owned just 0.27 per cent of total assets on these platforms. While these percentages appear small, they represent billions of pounds worth of assets. The FCA’s Investment Platforms Market Study (2019) revealed the orphan client population comprised around 400,000 clients, holding more than £10bn of assets on platforms. Alpha’s research suggests these numbers have grown since that study was undertaken.
In Alpha’s research, all platforms that participated provided fewer services to orphan clients compared to advised clients. In most cases, this includes a more limited investment range and the removal of some available actions, such as changes to drawdown arrangements.
Alpha’s research also shows that 65 per cent of platforms claimed to have put in place additional risk management and regulatory oversight processes because of their orphan client population. However, only a third provide any additional reporting to these clients beyond what is provided to an advised client. A further risk for investors is increased pricing for clients once they become orphaned due to the removal of any negotiated adviser discounts.
To identify orphan clients, only 20 per cent of platforms cited proactive engagement with financial advisers to confirm that there is a continuing service in place. This creates a risk of enabling the ongoing collection of adviser fees from orphan clients given the limited visibility the platform has on the adviser relationship.
While the FCA places the ultimate responsibility on financial advisers to ensure that platforms are aware of clients becoming orphans, the expectation is that platforms should have the right monitoring and governance in place to deal with this group of investors. The FCA stipulates that platform businesses have a responsibility to ensure that no unnecessary harm is caused to their clients.
Most platforms said they have a communications strategy in place for orphan clients. These communications generally include an explanation of any changes to the service due to being non-advised, the ability to appoint a new adviser, and details of the communication channels available to them. However, in general, these communications do not state the financial implications of retaining assets on the platform as a non-advised client. Further, only a third of platforms follow up with clients if they do not respond to the initial communication once orphaned.
Bruce Davies, Director and Head of Pensions & Retail Investments at Alpha FMC, says: “It is clear that the number of orphaned clients is growing, and the regulator has committed to conducting further analysis in areas where they may have concerns over an inadequate response from individual firms. Our study shows that platforms are generally taking a reactive approach, rather than proactively identifying and seeking a solution for orphan clients. On the whole, it appears that much more could be done to ensure that no clients are negatively impacted by being orphaned. As the industry continues to evolve and adviser platforms start to deliver improved capabilities and experiences, the benefits will be felt by the end-customer. This not only helps the relationship between the platform and adviser, but also that between adviser and client.
“The research shows there is an opportunity for platforms to readily engage with advisers’ orphaned clients and ultimately, if required, be able to satisfy the regulator that they have been acting in the best interests of the client. To make real progress, platforms should consider increasing their use of data and analytics to better identify orphans and ensure full oversight of this group of investors. Platforms should also think about how to proactively engage with their adviser communities to reduce the risk that orphan clients go unnoticed.”