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Special Report

Wraps and platforms - September 2012

Published by Investment Adviser | Sep 10, 2012

As the platform industry continues to develop at an alarming speed, this year has seen significant changes in the platform market, with wrap businesses coming under increasing pressure.

The biggest proposed change this year so far has been to cash rebates, particularly those paid by investment providers to investment platforms. At the end of June the FSA confirmed that it was to ban these rebates, presenting a significant challenge to the business models of wrap platforms in particular.

Wrap platforms differ from fund supermarkets – such as Skandia Investment Solutions – because they are paid for by financial product providers to feature particular products and also charge consumers. Rebates from product providers have typically been held in a customer’s wrap cash account and used to pay the fees for both the service and the adviser.

Fund supermarkets, on the other hand, have historically operated what is known as a ‘bundled’ model, which essentially means that they receive a payment from product providers for the service, usually in the form of a rebate of the fund manager’s charges. This model doesn’t charge the customer, although there are other charges at play here. The product provider, for example, may have to pay a shelf space fee for having their products listed on the platform.

Since the FSA’s latest pronouncements on the issue, the war of words between fund supermarkets and wrap platforms has escalated. Wrap platforms such as Nucleus are adamant they will have no problem preparing themselves for the RDR – particularly as the deadline for implementing its new platform rules looks set to be extended to the end of 2013.

However, Peter Mann, chief executive at Skandia UK, says: “Most wrap providers seem to have been more preoccupied with changing the regulator’s mind on this issue than building an alternative solution.

“Customers use platforms to invest in funds, not cash, so it is logical that any discount that the platform can negotiate for the customer should be paid into their funds rather than a cash account.”

A number of the fund supermarkets have also developed ‘unbundled’ charging models, which charge the client a separate fee.

In spite of all the upcoming changes, however, advisers overall currently seem to prefer wraps to supermarkets.

According to Fundscape’s quarterly platform report, wraps were dominant in the net sales table in the second quarter of 2012. Cofunds, which has topped the table for 13 consecutive quarters, saw a 4 per cent boost in assets under administration (AUA), jumping ahead of Skandia, the former number one in the league table. Fundscape director Bella Caridade-Ferreira says: “The transition to a fee-based model is driving adviser firms to wraps’ doors. As a result, the wrap cohort is outperforming traditional fund platforms in growth terms. Business is stickier among the wraps, so they’re punching above their weight in net sales terms.”

As they add new features, wraps may also have room to expand further. Research carried out by Investec Specialist Bank shows that almost a third of IFAs would increase the overall level of deposits held by their clients if wrap platforms were to offer a wider range of cash options.

Overall, platform assets in the second quarter were down slightly as a whole, falling by 0.3 per cent to £189bn, though gross sales were up by 1.3 per cent on the previous quarter to £12.2bn, while net sales rose by 5 per cent to £6.2bn, according to the report. However, as David Cartwright, Defaqto’s head of insight, says, significant opportunities remain for platforms to win new business in the lead-up to the RDR.

“Growth in platform adoption by advisers has certainly taken off in the past two years. We have also found that the growth in assets under administration has accelerated in this period. There is no doubt that the RDR has been the main catalyst for this growth as advisers review their business strategies in preparation for 2013,” he says.

“Platform providers face an equally challenging period in the run up to January. There are opportunities in this sector, but how can providers differentiate their proposition and effectively communicate what their platform offers to advisory businesses to stand out from the crowd?”

Standing out from the crowd is a growing challenge for platforms, however. With roughly 28 providers currently holding a total of approximately £191.5bn in assets under administration in the UK marketplace, there is no doubt that the platform industry is overcrowded. It didn’t come as a surprise to the industry when in 2010 Macquarie opted to exit the UK platform market, but what is perhaps a surprise is that others haven’t followed suit.

In a recent column for Investment Adviser, Ed Dymott, head of business development at Fidelity International, wrote: “For an industry which has now been around for more than a decade, it is surprising to see the relative lack of mergers and acquisitions (M&A). To date, we have seen Old Mutual acquire Skandia and Fidelity acquire Egg, but few others of significance. You could argue that the market is starting to ripen to more M&A, and it’s interesting to consider what effect this will have.”

Mr Dymott suggests that some of the smaller, more innovative start-up platforms simply “risk lacking capital to really grow to scale”. Mr Dymott compares this with a similar phenomenon in Australia, where the market was saturated with start-up businesses in a very short space of time.

A white paper produced by Capita Financial Software entitled Platforms – Big Issues and Big Solutions explains that in Australia the original vision was that platforms would become ‘a single holistic all-encompassing solution’.

The situation, however, has evolved, following much market consolidation that saw only four players remain, all of which are now more focused on asset management and trading. This leaves space in the market for adviser practice software solutions – Intelliflo, Focus and 1st The Exchange, would be examples in the UK marketplace – to deal with fact finding, risk profiling and any further analysis that an adviser feels necessary to carry out.

Mr Dymott adds: “In Australia we saw opportunistic start-ups launching platforms left, right and centre, purely to try and make a quick return. Many start-ups in the UK will be looking over a period of time to realise some value from their business and the likelihood is this will be from finding a buyer.

“In the future we will possibly see platforms merge to benefit from their combined scale. There is just not room for 30 platforms in the market. There will be some organic consolidation, but there will also be some through M&A.”

Overall, the RDR should present some platforms with the chance to win new clients, in spite of headwinds in regulation and investment markets. But although wraps may benefit from greater momentum than fund supermarkets in this process, even wrap platforms will still need to show they are different – and potentially more established – to avoid falling prey to their many rivals in the UK.

Jenny Lowe is features editor at Investment Adviser

The survey results and award winners will be announced in Monday September 17 issue of Investment Adviser. For a sneak preview, subscribe when prompted.

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