How the platform market will evolve

The business model of the larger players is increasingly coming under scrutiny as the buying power facilitated through rebates is diminished in the wake of the cash rebate ban, which comes into force for new business next month.

Aligned to questions over the larger players and predictions of consolidation - not the first time this sector, which has struggled with profitability over the years, has been expected to shrink - is a more general discussion around the rise of wraps and their relative value for post-RDR advisers.

Before RDR, the large fund supermarkets were general purpose tools many associated with non-sophisticated, lower-value investors who needed simple, straightforward products such as Isas.

In contrast, wraps were the boutique artisanal cheese shops and butchers, aimed at wealthier clients and extending into more complex products, including a range of then peripheral asset classes.

Wraps were also known for providing extra services for their more sophisticated clients free of additional charge, like capital gains tax calculators and risk profiling tools.

The big differentiator, though, was payment model. The supermarkets marketed themselves as free, while paying commission to the adviser and taking their own cut from bundled charges on the funds they provided access to.

Wraps on the other hand typically gave any rebates back to clients and charged them an explicit fee.

So now that the Financial Conduct Authority has abolished commission and just about every platform except Skandia - which is going to continue to offer unit rebates to facilitate negotiated discounts - has announced an end to rebates in all forms, where do the differences lie?

According to Kevin Okell, head of consultancy for Altus, the lines are set to become even less distinct, with most of the big supermarkets adding a wider range of tax wrappers, asset types and functionality to compete with wraps.

The age of wraps?

If this indicates that wraps are seen to represent a major challenge in a world where regulation has played in their favour, how worried do supermarkets have to be?

Well, it must first be acknowledged that platform business has hardly been lucrative historically - in fact, the sector as a whole has spent most of its relatively short history in the red on the profitability front.

This changed for the first time in 2013, says Mr Okell, when the sector as a whole finally edged into the black, if only slightly. However, he added that it was more of a consequence of a few big life company platforms changing their accounting policies than any radical shift in the market.

Given this, a substantial movement of money away from the larger players which have struggled to make money on huge asset volumes would be a worry - and advisers pulling money off the big boys and pouring it into their tenacious competitors is a narrative that the wraps are keen to espouse.

But in truth any shift is not necessarily because advisers are generally eschewing supermarkets, which are almost an order of magnitude larger.

“Overall we’re seeing explosive growth in the level of transfers to and from platforms, [with] volumes roughly doubled every month during 2013.

“There are substantial flows from supermarkets to wraps but there are also even bigger flows into supermarkets from outside the platform industry. This is probably IFAs moving directly held funds onto platforms to help them deliver an ongoing service.

“The net result is that platforms are growing, but it’s probably that the supermarkets are getting a lower margin institutional business rather than clients directly so their overall profitability could be expected to decline.”

On the other hand, Mark Polson founder of The Lang Cat consultancy, believes the supermarkets should be wary of wraps.

“There is no doubt that as advisers have created their full-on wealth management models post-RDR, they’ve looked for more full-service platforms, with open architecture, a full range of wrappers, and a bunch of other stuff that the supermarkets were never born to deal with.”

Thinning the ranks?

One consequence many have predicted based on the lack of profits across the sector and narrowing or business focus is that there would be a wave of consolidation or that otherwise many players would leave the market, bringing the current 30+ provider single down to a single-digit number.

It’s now been 14 months since RDR’s introduction and we have not seen any high-profile exits. In fact, as Mr Okell says, 2013 was the first year ever that the platform market slipped into profitability as a whole.

Mr Polson maintains that we might see some exits by platform players, specifically “sub-scale hobbyists” have been around for a while but not been able to swing into profitability. However, this will more likely be a withering on the vine than a dramatic winding up.

“There are a few platforms who’ve been at it for a while and are still far under £1bn in scale. They will probably, very quietly, fade away over time.”

Standing in the way of big acquisitions are the challenges of bulk-migrating clients to a new tech system. There is consolidation happening, except it’s happening behind the scenes, with the underlying software providers.

The majority of the functionality of a platform is common to all players, ie buying and selling funds or securities, handling dividends, regular reporting etcetera, and it’s done with off-the-shelf software. That remaining fraction not common to all is the interface which provides the unique user experience tailored to each platform’s preferred distribution method.

With the commoditisation of back-office systems with off-shelf providers including FNZ, Citi, IFDS, Pershing and SEI, the cost of the technology will go down.

“As the back-office providers build more scale and standardise, it becomes easier for other brands to enter the space so we may still see a net increase in the number of platform brands,” says Mr Okell.

You read that right: more platforms, not fewer. And the differences from the expected narrative do not end there.

This reduced cost of technology could also allow for greater customisation and configuration for more distinct and varying business models, which may nudge competitors towards seeking niche markets rather than becoming increasingly homogenised.

Mr Okell adds: “I see a blurring of the lines between advised and D2C platforms as it dawns on everyone – even the regulator – that clients want to dip in and out of advice and pay only for what they use.

“I also think we’ll see an emerging distinction between investment platforms that focus on wealth management and more holistic platforms that cover all of a consumer’s financial affairs including protection, banking and borrowing. These are most likely to come from established big players like the banks and life companies.”