The number of orphan clients on investment adviser platforms has significantly increased in the last year, according to new research from Alpha FMC (“Alpha”), the global leader 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 £260bn of assets under administration, found that the number of orphan clients grew by 23% year-on-year in 2020. This continued increase means the number of orphan clients on adviser platforms has risen by a substantial 185% from four years ago.
The proportion of the assets owned by orphaned clients has also increased significantly. In 2020, an average of 1.7% of the total assets under administration on adviser platforms belonged to orphan clients. Back in 2017, orphan clients owned just 0.27% 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% 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% 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.