So, that headline is a pretty classic bit of clickbait as a title for a technology piece; somewhere up there with “16 reasons why Pixie Lott (whoever she is) prefers superclean share classes” or stuff like that. I’m sorry about that. But a few interesting things have happened over the past month or so (conveniently) which are helping me think a little differently about the question of what happens next to the platforms market.
Maybe they’ll make you think differently too. Maybe not. Let’s find out.
The first comes from a conference we ran the other week, along with the redoubtable Mr Clive Waller, on investment outsourcing. During the day we had loads of stuff, like croissants and cake and things, and some people also talked about centralised investment propositions (Cips) and what to do with them. We spent some time talking about the relative demerits and merits of multi-asset/multimanager funds versus discretionary fund management (DFM)-style model portfolio services (MPS), and that’s what’s got into my head.
It breaks down like this. We, as an industry, and I’m generalising hugely, assume that wealth = sophistication of requirement. We do this because we generally charge percentage-based charges, and someone with a lot of wedge pays more than someone with less. This leads us to some frankly fairly hinkyjudgements about what form of investment outsourcing might be appropriate. In our research for a big study (‘Never Mind The Quality, Feel The Width’, available soon, cheers) we find that while it’s impossible to draw empirical, direct lines of suitability from a type of Cip to a type of client, many advisers do feel that more generously upholstered clients need a little more than just a multi-asset fund.
The feeling seems to be that your client reporting will look anaemic if it only has one line of stock on it and the client may well balk at paying your very reasonable adviser charges. Now, we’ll move past the point that financial planning relationships should have little to do with funky performance graphs with lots of lines on them, and assume that this argument has merit.
Dividing lines
This would lead you to using DFM-MPS-style propositions for wealthier clients and multi-asset type funds like MyFolio, Architas, AAP, Merlin and so on for less affluent ones. But, as one DFM pointed out to me, this doesn’t make sense. It’s the propositions which rebalance inside a fund wrapper which are best for clients who have CGT issues; you can detach the management of capital gains from the need for coherent asset allocation. So, if we can get past the one-line-of-stock issue (as MyFolio does on SL Wrap, for example), then that’s a potential handy piece of kit.
This all makes sense, and is probably obvious if you spend time on it. But a complication came from Rory Percival’s session in the afternoon of our conference (which was called the FE Investment Summit; you can get slides from the lang cat website). One of the things Rory mentioned on the way past is that if you’re simply holding one fund for a client, what’s the virtue of a platform? Why aren’t you holding that fund directly? Are you doing that due to client suitability or because it suits you as an adviser?
This isn’t a dumb question. Many investment managers are now putting platform-style functionality in place to manage the old book (thank goodness, it could do with a brush-up). Assuming they manage to find their back ends with both hands and a map, why shouldn’t this be a useful way of holding a multi-asset fund or similar without layering up costs? Especially if back office integration is there for reporting purposes and if the manager puts a look-through reporting facility in place.
And now if we overlay the fact that these funds could be suitable for more affluent clients, have we punched a hole in some of the core business that platforms do?
We’ve known that platforms are where it’s at for so long now, that maybe we might be missing some very simple things which could – in the eyes of regulatory observers at least – be at least as suitable as the default platform solution.
Undisputed benefits
So that’s the first one that got me thinking. The second is from a bit of work I was doing with a platform provider who was having trouble convincing a particular adviser firm of their many undoubted and undisputed benefits. The thing was, this firm, which isn’t massive, has pretty much built their own version of the financial services industry when no-one was looking.
They’ve got an investment manager acting as authorised corporate director (ACD), administrator, Isa plan manager and custodian for a bespoke range of risk-modelled Oeics. They’ve got a third party Sipp provider working with the fund manager. They’ve got reporting coming out of the back office, and they’ve got a client portal that they’ve built themselves (and spent proper money on).
Now, not every client will fit into that proposition, which in any event looks pretty restricted in nature, but that’s a different argument. My thing is – if a mid-size regional firm can get their Cip packaged up, hosted, put inside a Sipp and communicated to clients via a bespoke portal, what value do they get from a platform? There might be some minor price arbitrage at some points – a few bps here and there – and there might be some potential risk management benefit in not having your ACD being your custodian, and it might be nice having a third party running your portal, but other than that?
If you can avoid shoehorning while keeping your Cip focused, and have enough scale to make it work, it seems to me that it is now absolutely within reach of adviser firms to build their own version of the platform market, without actually using platforms. If we strip away all the layers, what we are using platforms for is custody, dealing and execution – and if we can do that more cheaply or in a more controlled way elsewhere, then why not?
It seems to me that we’ve hit an inflection point with platforms. Most do most things tolerably well most of the time. The market is starting to look a little staid; a little in need of a shake-up. Most folk – me included – have assumed that that would come from new entrants or new platform developments.
Instead, I wonder if those who are happy to have focused propositions might not simply move beyond platforms, almost full circle back to direct holdings – but with the power in the hands of the adviser rather than the provider. If platforms want to defend against this (and I have no doubt that many would consider me to be absolutely smoking dope here) then I think they have two things they need to do. It’s the same two as always.
Firstly, they need to stop charging clients for adviser practice management functionality and remember that the benefits accruing to clients from platforms are aggregation, visibility, integrity of dealing and custodianship. Secondly, they need to get much better at articulating those benefits in a way which helps advisers build a case for using the platform against building alternative propositions elsewhere.
This isn’t a big thing yet. But spool forward a year or two and it could be – and the consequences could be pretty profound.
Mark Polson is principal of platform and specialist consultancy the lang cat
