Mind the gap when it comes to platforms

My sense is that there is a very short and a very long answer to this question.

The very short answer is to choose the platform (or indeed off-platform solution) that is most likely to meet the needs of the client over the timeframe under consideration.

The very long answer starts with the recognition that it depends on a very long list of considerations, probably including (but not restricted to) functionality, service, connectivity, price and culture. The timeframe is also important here, as portability is not yet where is needs to be and therefore the hassle and cost of moving between platforms (or other solutions) cannot be overlooked.

This long list of complex issues makes choosing a platform pretty tough – sure, there will always be a platform that claims it can do it cheaper, but can it really? Does the cheapest on the block score well in the other key categories, or will your clients be left to regret putting price before form? And even where price is one of the primary drivers, what is the likelihood of today’s cheapest platform still being the lowest-cost offering in five years’ time?

Before even getting to price, the primary consideration must always be client requirements, now and (to an appropriate degree) in the future. The collapse in the market share of the fund supermarket platforms has been stark, and demonstrates how easy it is for a platform to take an eye off the ball and start to misjudge the needs of future customers. One thing that seems pretty important is to understand where each platform is heading, how much it is investing in the future and how aligned its future is with the needs of your clients. This is hard (probably very hard) because some platforms change direction with the wind, others do not know where they are heading themselves and some are exposed to intervention outside their control.

This is why we see culture as important. It is the seldom-discussed part of the due diligence process, but it probably reveals more than any PowerPoint presentation or sales pitch that you might be subject to. Are the platforms under consideration really driven to generate better client outcomes, or have they just started to use that language since Martin Wheatley took office as chief executive at the FCA? Do they view their primary relationship as being with the client and their aligned adviser, or with the fund management community? Do they consider themselves to be facilitators of great financial advice, or a distribution channel for funds? There are endless cultural differences in the market, but these questions give a clue to intent, and therefore to purpose.

Platforms aligned to fund managers (including in-house operations) will inevitably seek to influence the choice of funds, despite such activity being outlawed by the FCA. If you do not believe me, simply ask what proportion of overall assets are invested with the in-house or ‘preferred’ funds and then assess how likely (after reflecting for pricing) such an outcome is down to chance.

Bias has been the scourge of our broader market for years and it remains disappointing that this kind of damaging behaviour persists. Too much ‘shareholder before customer’ conflict will invariably play out to the detriment of customers.

There continue to be massive differences in functionality and connectivity between platforms, and while some areas have become more commoditised, there are few instances where apple-to-apple comparisons can readily be made. Most surprisingly, this is even true where the same technology vendor sits behind the platforms under comparison.

Aside from a few areas, this gap seems set to widen before it narrows as platforms take an increasingly prominent role in the sector. If you look at how the discretionary fund manager sector has been forced to reorganise to respect the new order of the market and extrapolate that theme across other areas of the market, we are some way adrift of harmonisation.

Likewise connectivity. Whether between platforms and back-office systems, cashflow modelling tools, risk profilers, regulatory systems or any of the myriad of tools in use, there remains wide disparity in the breadth and quality of execution in this area. Part of the problem is the sheer number of potential integrations. Another is the technology enabling the integration. While the rest of society is embracing web services, there are huge sectors of retail financial services still relying on proprietary standards to join up systems.

Beyond these areas, the key point seems to be the extent to which advisers might use a single platform. Given that the FCA is fed up answering this question there is probably little more to add, but I would imagine that provided the customer outcome has been the primary consideration in each instance there is little to fear. Similarly, and even recognising the potential operational benefits of single-platform use, for as long as the adviser market is restructuring via exits or consolidation there can be few firms for which a single platform model is truly achievable.

This position seems set to naturally evolve in keeping with the shape of the respective adviser and platform markets, and it does not feel like a terrible stretch to imagine a situation in 10 years’ time where platform pricing has converged to such an extent that single platform models are more prevalent than today. That certainly seems more plausible to me than the occasionally revitalised wrap-of-wraps model oriented around a back-office system.

While the attractions are pretty obvious, I am not sure that anyone has thought hard enough about functionality mirroring and the consequential brake on innovation that would ensue. It is like Facebook slowing down because it is waiting for Hootsuite to catch up. Even if the technology overcomes the massive gulf between aggregation and asset aggregation – as first mooted by platform consultant Stan Kirk – advisers need to also consider the substantial issues around data ownership, freedom of movement and governance. It is quite one thing to trust an unregulated software company to display a load of data. Expecting the same organisation to take responsibility for operational matters, integration indemnities and such like is quite another.

As an aside, I gather that migrating from one back-office system to another is a lot less straightforward than moving assets from the most legacy of providers to the most modern of platforms. As adviser businesses continue to become more operationally tight and client data ownership (and its security) move up the agenda, this may become a bigger issue.

Overall, this remains a tricky area and due diligence tools are patchy. My advice? Be clear and confident in what you are aiming to deliver for your customers, be cynical towards sales pitches and choose the solutions that are most likely to be aligned with outcomes you are shooting for.

David Ferguson is chief executive of Nucleus