Boom and bust?

While seeing huge growth, many of the underlying business models of platforms themselves do not make for a pretty financial picture, with expansion being the only solution to unsteady looking books. This is likely to be exacerbated by the increasing focus on costs that the RDR and current low-return environment is bringing to all sectors of the financial world.

It is predicted that unbundled charging models, where all fees from all areas of the platform are made explicit, will increase this focus on costs when advisers and this is up for debate and whether it will enact change remains to be seen.

Rising number of platforms

The platform market has boomed in recent years. Data from the Platforum, a resource on the market, shows that 21 platforms exist in the adviser market. This does not include network offerings, which represent an additional 10.

Table 1 shows the size of each platform that participated in the survey and the size of the total market, now totalling £16.8bn. This compares to £15.1bn from the last Money Management survey of the market, as at 1 September 2011.

The sector has seen huge growth in recent years, growth that many predict is not sustainable. Some believe that as the average adviser uses two or three platforms at most, there is no need for all these, particularly as many offer the same or very different services.

However, Holly Mackay, managing director of the Platforum. believes that the rising market is likely to be in the direct-to-consumer sector. With the RDR expected to lead to many orphaned clients, who do not have large enough investments to justify the fees advisers will be charging, it is said there is a large market to go direct. While the consensus is that most of this will go to the banks, there is also a healthy belief that platforms can sweep some up. There are already prominent names in this market, such as Hargreaves Lansdown, BestInvest, TD Waterhouse and more, but there is certainly room for growth.

A whole new world

Platforms do not escape the impending sea change that the RDR brings and many have had to make big changes ahead of the 2013 deadline to get their house in order. The main aspects of these are:

•Product selection – to ensure that all products on the platform are in line with the new rules.

•Unbundled pricing – offering an alternative to the bundled charging model, in which prices are explicit, upfront and separate.

•Clean share classes – getting clean share classes from fund houses to allow the new charging model.

•Disclosure – changing terms and conditions and allowing segmentation of clients etc.

There is more to the changes than this and some platforms are not yet fully ready. For example, Cofunds has not released its new charging model, although expects to in September, while Skandia is releasing details in the rather broad timeframe of “summer 2012”.

This is late for many advisers, who by now will have had to decide which platform presents the best post-RDR proposition and which charging model suits. It means many IFAs are shooting in the dark to a certain extent when placing their clients on platforms that have yet to come to market with their model. Charlie Musson, head of public relations at Skandia, says that it is an important decision that it wants to get right first time, so it is taking its time. But as other platforms have come to market with their model, it does not seem beyond belief that others could have done likewise.

Table 2 looks at the charges from each provider, which offer no easy comparison. As with SIPPs, the market does not have a uniform charging model, making an adviser’s job no easier.

As the Table shows, some platforms levy a flat annual charge, inclusive of trades and switches, while others charge per transaction, with additional fees for more exotic investments.

In addition, the Table also lists the alternative charging models that some platforms have, for their unbundled and bundled or in Elevate’s case ‘composite’ and ‘explicit’ models.

The changes in preparation for RDR will have undoubtedly had an impact on the other workings within the platform company. As with other areas of the financial community, RDR has meant a lot of work on infrastructure, rewording documents and planning, meaning that other areas of the business may have suffered.

Alistair Conway at Cofunds says that the company predicted this and increased its IT capacity threefold in 2011 to ensure it could respond to other demands. Other smaller companies may not have the capacity to do so, meaning that innovation or other new developments may have taken a hit this year.

That said, some platforms were ahead of the game. Nucleus’ chief executive David Ferguson says that the company was always more ready than most, and now does not think any more changes will have to be made until 2014, and even then it will be a few tweaks.

Cash accounts

It is no secret that cash is king at the moment. The continuing turmoil across the eurozone, which is leaking out to other countries, means investors are sitting on piles of cash waiting for an opportunity to invest that is not fast coming.

Research from BestInvest shows that in May there was a 66% increase in investments to cash, with a quarter of all the month’s investments going to the asset class. It is a move being mirrored by asset managers, with some fund managers being 100% exposed to cash, while a poll by Thomson Reuters of 15 ex-UK European fund management firms shows their average balanced portfolio had 12.5% in cash in May – the highest for two years.

The theory behind the rush to cash is sound, but only if investors are getting decent returns in this safehouse, and many are not.

Table 3 looks at the cash rates offered by platforms on their basic deposit accounts, and they do not make attractive reading. In fairness, many platforms argue that these accounts should only be used for dealing, holding a small amount of cash in them as a result of rebates and large sums for short terms in between investing. But the theory differs from actuality.

Much the same as investors intend to renew their ISA after it falls to a low rate, but fail to do so, many leave large sums of cash in these accounts. In addition, the lack of other cash options for investors on some platforms means many default to this account for lack of options elsewhere.

Some providers offer fixed-term deposit accounts, although whether these offer competitive rates is up for question. And just seven of the 18 companies showing data in Table 3 offer the ability to move cash to better accounts and stay on the platform. What’s more, only two allow this for free, meaning that investors who want to seek better returns can end up paying through the nose to do so.

While some may argue that other options can be used, including taking the money off platform to invest in cash, the question remains that if some providers can offer better rates in these accounts then why cannot all?

Transact is currently giving 1.03% on deposits, while Nucleus’s current rate is 1%. Standard Life comes in with the highest rate, of 1.65%, but this is only available for those putting £100,000 or more in the account.

Put simply, the reason that investors are not getting better rates is greed on the part of some providers. Half of the 18 companies in the Table retain interest paid by the banks, skimming off a percentage before passing on the rest to investors.

Unsurprisingly, providers are not forthcoming in how much they actually take, with many saying that it is either a “small amount” or that it is commercially sensitive data. Cofunds comes up trumps for actually revealing that the average sum is 0.2%, but this does mean that the platform is making twice that of the end investor.

This taps back into the whole bundled and unbundled charging debate and surely if platforms are moving to an unbundled model, this should also include cash account margins. If investors are paying an upfront free and transaction fees, they do not expect more money to be skimmed off their meagre interest.

However, it seems IFAs are largely ambivalent to this issue. Research from Investec Specialist Bank shows that only 22% of the 100 advisers it questioned want more competitive cash options on platforms, while just 16% want a wider range. It also seems that the current low rates are not concerning them, as 45% did not know the average rate that clients were being paid on these accounts.

Herein lies the issue. Advisers are the users of platforms, not investors. What advisers want the platforms will, within reason, aim to do, in order to keep their customers happy. If advisers are not bothered by the restricted cash options, then what pressure is there on platforms?

Splitting the pool

The restricted versus independent debate is raging on in the adviser world, with the merits of both models being bandied around, but how could this affect the platform market?

Some believe that certain platforms will have to split into two models, one catering to restricted advisers and the other to truly independent models. With estimates of between 20% and 80% of advisers going down the restricted route, even at the lower end of this range it represents a chunky market for platforms.

In its recent paper on the models, the FSA stated that those being independent should “not be restricted by product provider and should also be able to objectively consider all types of retail investment products which are capable of meeting the needs and objectives of a retail client”.

This means a platform wanting to cater to this market needs to ensure it is truly independent and able to host the entire remit of products, including ETFs and investment trusts, which have historically not been available.

Structured products are another good example, as until recently they were not hosted on any platforms. This has changed, but they are by no means commonplace on platforms. For the truly independent adviser to be able to demonstrate that they are covering the entire market, they will want to show that they have looked at this area, which is harder if the platform they use does not support them.

Table 4 looks at the investment options offered by each platform, including the number of funds and range of assets available. It also looks at the number of DFM and SIPPs available, meaning advisers can see how well the platform suits its clients.

In its paper, the FSA adds, “A firm can use platforms in providing independent advice but needs to remain aware of the limitations of its chosen platform and advise ‘off-platform’, or through another platform, where this is best for the client.”

One option for platforms is to run two models, as already revealed by Axa Wealth and Standard Life. The models are likely to be cheaper for restricted advisers, with Axa Wealth stating that it will allow advisers to pick the aspects of the service they want and be charged accordingly.

However, this model has been criticised by some of the new generation of platforms, who believe that a lower charge subsidised by an asset management company is not an ideal way to operate.

Nucleus’ Ferguson believes that separate models are not necessarily needed, with the current model able to cater to restricted, in the same way that it caters for pre-RDR advisers. That said, he does acknowledge that Nucleus will not be aiming for the highly restricted market, adding that it would not pitch for the business as it would not be competitive.

Service, service

Table 5, available online, looks at the options offered by each platform in its back office and service systems. Advisers are divided on whether they believe platforms to be purely a service offering or if they deliver more. This Table helps to discern.

Some deem them to just be an admin tool, that helps to pool assets in one place and offers more efficient working, with some platforms happy to be aligned with that view. Meanwhile other platforms are more akin to a product in themselves, offering a wider range of tools and features.

The services offered by platforms are also deemed to be a key driver in their popularity as the market grows and advisers have increasing levels of choice. As more platforms are predicted to come to market, with similar propositions to existing models, the level of service and ease of working they offer advisers is likely to come under more scrutiny.

Indeed, many believe several companies have sought growth at the expense of service, seeking out new investors and advisers before they have the back office capability to support it. AJ Bell says it will be a key factor, “With many platforms operating at low or no profit, it is understandable that growth is crucial in this market. However, we are not convinced it is at the expense of service.”

Standard Life adds, “Achieving growth post-RDR goes hand-in-hand with delivering industrial strength service to advisers and clients.”

Single platforms

It has been a busy period for the FSA’s platform department, with the release of guidance on the number of platforms that should be used by each adviser adding to their releases. The FSA warned that they would take a dim view of advisers just using one platform, unless they could prove that it was suitable for all clients.

Most recently the regulator has released information on the use of centralised investment propositions, such as DFMs and model portfolios, and warns against the shoehorning of clients into these options, mirroring its views on platforms.

Rather than just stating that one platform is never right, the FSA said it would find it highly unlikely that an adviser would find one platform right for its entire client bank.

In the furore that followed its comments, advisers, platforms and providers all aired their views, the most common being that one platform was just fine, thank you very much.

The guidance follows the FSA’s wider emphasis on suitability that accompanies the RDR, with a focus on the right investments being suitable for clients and the adviser’s ability to clearly document this.

Many advisers say that their clients’ needs are similar, meaning that one platform can be right for all, and providers back this up. A spokesperson for Ascentric says, “If they [advisers] have a relatively homogenous client bank then it can be possible to use a single platform solution.”

However, other providers differ and appear to welcome the increased competition that advisers needing more than one platform will bring. Aviva states, “We anticipate that most advisers will use Aviva as part of a multi-platform approach, where the respective strengths of the platforms used are matched to the varying requirements across a firm’s client segments.

“We also expect that other platforms will start to clearly define which clients they are best suited for, and those they are not well suited for.”

If this comes true, we could see providers aligning themselves to one market, effectively shunning other investors. But is this realistic and is it sustainable?

Onwards and upwards

The year has been busy for platforms, not only having to deal with readiness for RDR, but also sitting in the firing line of many FSA papers and musings. This does not appear to let up, with implementation from the latest FSA paper on platforms, discussed elsewhere in this special report, coming in at the end of 2013, platforms face yet more change.

There is also no doubt it is a key market that is increasing in importance. More and more advisers are adopting platforms and post-RDR, when efficiency will be key in an explicit fee-charging environment, anything that gives an adviser more time to spend with clients will be a good thing.

However, the increasing importance of platforms is likely to see them come under more focus from the regulator, with some predicting they will be deemed a product and come under full regulation, in the same way that SIPPs did years ago.

The adage that if it looks like a duck, walks like a duck and quacks like a duck, then it probably is a duck, is likely to be truer than ever.

laura.suter@ft.com