Platforms: To merge or not to merge

The implementation of the RDR at the beginning of 2013 is helping drive more of advisers’ business through investment platforms. In particular, the FSA has highlighted when advisers may need to use more than one platform for their clients if they wish to retain their coveted independent status after the RDR comes into effect.

But with roughly 28 platforms already in the market, and total assets under administration (AUA) of £191.5bn at June 30 2012, advisers face an almost overwhelming choice, with more niche offerings complementing larger firms such as Skandia, Cofunds and Fidelity FundsNetwork.

This wide range of providers suggests the market is ripe for consolidation as it remains to be seen how many platforms the UK market can sustain. Yet the signs appear skewed more towards further expansion than an explosion of merger and acquisition (M&A) activity.

Holly Mackay, managing director of Platforum, points out that Aegon entered the adviser sector as recently as late 2011 in a partnership deal with Novia, while Zurich is expected to launch its platform later in 2012. Moreover, in spite of the increasing number of platforms in the market, she says consolidation in the industry is not a given.

“While we think there are ‘logically’ too many adviser platforms, it is not a given that the outcome will be M&A. Mergers involving two different IT systems are notoriously hard to manage,” she says.

“On the acquisitions front, it’s very hard to actually value a platform. Re-registration [of clients’ investments from one platform to another] is getting easier and easier and the acquisition of any platform may fundamentally change the make-up of the customer base and the asset pool. Put simply, advisers might just up and leave.

“Additionally, big global outsource providers are starting to look to the UK platform market, as evidenced by last year’s acquisition of Scottish Friendly by Citi. I think it’s less likely therefore that the primary driver of any platform acquisition would be getting your hands on the technology as this is easier to outsource than ever. So it’s complex.”

In corporate terms, Alastair Conway, sales and marketing director at Cofunds, suggests the industry should look forward to 2013 as key for platforms following the implementation of the RDR.

“I think you’re unlikely to see any major changes at the start of the year, but as the year progresses, if some of the promises and hopes and dreams are not being fulfilled, I’m sure some pressure will come onto those organisations. If it is then possible to buy them and absorb them into another organisation, or whether those platforms just look to exit the market, we’ll have to wait and see.”

The profitability hurdle

Another factor that might inhibit mergers and acquisitions in the sector is the state of platforms’ balance sheets. Profitability is a key indicator when assessing companies’ financial strength of a company, and on some measures many platforms are making a loss.