Platform View: Consolidation is inevitable

There were roughly seven platforms then, and now there are roughly 30. Some consolidation... some experts.

But those experts won’t be wrong forever. In the US there are fewer than 10 core platforms for a population of 310m with several trillion dollars invested. The catalyst of the change to platforms has varied in each market. In the US it was rational consumer economics, in Australia it was compulsory superannuation and in the UK it will be the RDR. But why has it taken so long here?

The main reason seems to be outrageous optimism. All the players believe they will be one of the few that survive. The chances are that two thirds will be wrong. Of course, some might say an alternative strategy is to be taken over, but that option expects a good price. The problem is that a predator won’t pay the expected price and transfer the business to their own platform and make a profit at the same time; so that exit is probably an unhappy one too.

So who will win? Past evidence from many industries would indicate it will be those with the lowest costs (and I mean cost not market price). Yes I read about Bentleys not being priced the same as Vauxhalls but – let’s be realistic – a platform is an administration service, not a luxury item designed to prove one’s status in the world. Platforms will become commoditised and in such a market, a substantial premium is not sustainable for the same service.

In the US there are fewer than 10 core platforms for a population of 310m with several trillion dollars invested

But there is a lot in that qualification – ‘for the same service’. Each platform has its strengths and weaknesses and so far the industry is not homogenous in its demands for platform services nor are platforms homogenous in the provision of those services.

This means that consolidation will be delayed by the ability of platforms to offer subtle distinctions in both functionality and service offerings to specific market segments. But is the differentiation sustainable and how quickly can platforms all offer those subtly differentiated services if at all?

This is what I believe will emerge through 2013. The survivors in the market will be those who can make money to reinvest in the inevitably continuous systems development. This means they are fundamentally low cost and efficient and provide a superior service for the price charged.

Survivors will also be those who can adapt quickly to changing market demands and offer different services to different segments, presenting a flexible proposition reflecting customer demand. This adaptability is best represented by the culture of the organisation. Profitability and flexibility are the two best indicators of future success.

A possible exception to this is an organisation with vast amounts of capital and very tolerant shareholders. It is interesting that the common attributes of past market exits have been that the organisations were very large and not UK owned.

Eventually consolidation will occur as platforms are offered a price which exceeds the present value of continuing in business or exceeds the present value of letting the existing business run off.

What will that all mean for adviser firms? One presumes that they would prefer to back a winner.

Yet more for adviser firms to consider in the platform due diligence process.

Hugo Thorman is chief executive officer at Ascentric