Business schools’ professors just love comparing one industry to another, to learn lessons, often with very little justification. The recent MBA student will bore colleagues rigid by telling them how similar retail investment is to the drugs industry. Nonetheless, one that really does measure up over time is the comparison of retail financial services and the retail food/grocery sector.
In distribution, there are nationals, networks and locals in each industry. There are big brand manufacturers and boutiques. The most valuable lessons come from vertical integration. The biggest message learned by innovators such as David Ferguson, chief executive at Nucleus, is that distribution can and should own the customer. That is why Walmart, Carrefour and Tesco are the three global giants. At one time, biscuit makers Huntley & Palmers had a far bigger brand than any distributor.
In UK financial services, regulation largely ended the vertically integrated business. The only survivors are the high street banks (just) and SJP, a lighthouse of success in a dark sea of failure. This is set to change, despite and because of regulation. One of the drivers of change is the adoption of platforms.
In recent years, we have seen the major networks develop platform strategies, often with dire results. One of the longest sagas was the alliance of Norwich Union and Millfield to produce a platform. Over £100m later, this became Norwich Union’s platform, but not for long.
Bankhall managed to get Portavista off the ground, but with limited success. Capita ultimately pulled the plug on the software and the platform was closed down.
Honister toyed with the idea for some time and was in advanced negotiations with software providers before, wisely, deciding against it.
There were two major obstacles:
* Network members are hugely independent and tend not to do as they are told without good reason.
* The platform would have to be better than best, almost impossible with an extra scrape for the network and something to make it worthwhile for the member
Then, of course, along came the Difs, or as Dan Waters, then of the FSA, called them, broker bonds. Difs have not gone away, but RDR will prohibit a margin trickling down to the adviser.
In a post-RDR world, most large adviser businesses will either specify the platform that their advisers recommend or gently persuade them.
There are numerous reasons to specify the platform:
* It is far cheaper to run one, or possibly two, platforms across the business with common process, less training.
* Better deals can be negotiated.
* An improved infrastructure can be built within the platform itself fully integrated with other systems in the business.
* It will aid consistency of advice.
* Investment models can be run on platform from risk to asset allocation and fund selections and all joined up, for example risk tool matches funds.
* Platform processes will have built-in compliance.
In short, why would you not?
One reason is that you might persuade the regulator that you are not fully independent. That may not matter as the benefits of a restricted proposition can easily outweigh those of independence.
You can embed investment propositions that meet the requirements of suitability, consistency and good value that would make good sense to any sensible, objective, professional observer. Sadly, this does not include the FSA, which has just confirmed its bizarre view that independence means you have to consider any investment product, however obscure, for every client. This requirement is far tougher than any on doctors, accountants and lawyers, all of whom can exclude areas of expertise from their practice and refer clients to others.
This requirement will push many advisers towards a restricted proposition. Once that hurdle has been overcome, it makes sense to see what other benefits there are when IFA status becomes a non-issue.
Research tells us that two-thirds of national and network firms intend to offer a restricted proposition, whereas two-thirds of all advisers intend to remain independent.
The issue of IFA-branded platforms is not new. In a piece of work for JP Morgan Funds Hub some 10 years ago, advisers were asked if they wanted to “own brand” the platform. Many did.
Providers such as Standard Life Wrap emphasised that the key message was around wrap being a service rather than a product. If the IFA is delivering a service using a platform then presumably they would want their own brand in front of the client rather than that of the provider, particularly when giving online access to clients to view their portfolio.
With RDR and the move to developing client service propositions, this is certainly a popular feature of the platform. A number of IFAs also have a link from their website directly to their wrap platform and this enables a common look and feel across their proposition.
Gillian Hepburn, director of Edinburgh-based Quality Platform Solutions, said: “I believe that by ‘branding’ their platform, IFAs also then feel more comfortable in terms of the whole issue around ‘who owns the client’. In a sense this further distances the wrap provider from the IFAs’ clients.
“Unfortunately, the downside is primarily with the documentation produced by the platform.
“While any reports generated by the IFA, such as valuations and performance reports could be produced with the IFA brand on them, any client-facing documentation produced by the platform provider, such as illustrations, contract notes, annual statements, direct debit mandates, are still branded by the provider, generally for regulatory reasons.”
Branding
So while the IFAs are trying to promote a branded service proposition through their platform, the client was still receiving mail directly from the provider.
Ascentric offers the ability to brand the service for adviser firms so that it looks like the IFA web service as well. They also go one step further. They also offer a white label service so that the whole proposition is tailored to the distributor, for example, charges, charging structure, products and wrappers. This has proved very successful. But there is a demand to go even further.
Hugo Thorman, managing director of Ascentic, said: “As we approach RDR, there is now also demand for what is now termed vertical integration. This means the adviser becomes regulated to run a platform which has important implications for capital and requires suitably ‘skilled persons’ to make it work.”
In future, it is likely that distributors will not be able to retain any margin, so unless they become vertically integrated, they must offer the platform at its price directly to the client and recover their required margin from the client.
Two huge players who have been quietly building market share in the UK are SEI and Pershing. SEI powers Towry, RSM Tenon, True Potential and Bestinvest among others, while Pershing has been quietly piloting their proposition for some years before going public last year.
Of course, one should not forget that Hargreaves Lansdown has been running its own platform, Vantage, for years – and with enormous success.
A key attraction, of course, is retaining the margin. If you are big enough, why give it away? Moreover, the client cannot be wooed by the platform if the platform is yours.
Control is the big issue. The distributor creates the terms and conditions. In the case of SEI, the distributor builds the front end. Thus they can offer their own Isa. They can offer Sipps from as many providers as they like.
As I said earlier, this may mean a restricted proposition. That said, Andrew Fisher, chief executive of Towry, said last year that his firm does not have a platform, but it has an admin hub and he would not expect the regulator to be concerned with whatever administration systems Towry employs. He is, of course, right.
I have always been concerned that the FSA is too keen to regulate platforms as if they were products. They are merely expensive bits of IT, continually developing and changing.
All around the world, people shop at a Walmart, or a Carrefour or a Tesco. They like the choice; they like the price.
It is important that the platform market is allowed to flourish and develop without unnecessary regulatory restraints in order to give the customer a better service at a better price.
Clive Waller is managing director of CWC Research
