Funds of our fathers

However, prior to Fidelity, Skandia Life had introduced open architecture, offering investors a range of mutual funds within a number of its product wrappers - life and pension policies, then Pep and then Isas, under its multi-funds concept. Wrap players such as Transact and James Hay joined the market shortly afterwards, moving the market on towards full open architecture by encompassing a wider choice of investments and tax wrapper solutions.

Insurers were seeing their traditional life and pension business falling away as investors became increasingly disillusioned as a result of the mis-selling of personal pensions scandal, followed by problems with bonus rates on endowments and market value adjustments on with profit bonds. IFAs were increasingly unhappy with the performance of insurers’ in-house funds. Open architecture has increasingly been adopted over the last 10 years as a defensive measure, which has benefited platforms and fuelled the transfer of portfolios to platforms.

Since 2000, the market has swollen to over 25 platform players and £176bn in the advised space alone. The direct channel, harder to quantify in terms of the number of players and traditionally dominated by Hargreaves Lansdown, accounts for over £73bn in assets under administration as at September 2011. And despite the corporate platform market being in its relative infancy, current players operating in this market have a collective 62 corporate customers which in turn represent 240,000 employees and an estimated £100m assets under administration, excluding existing pension assets. A busy market across multiple channels.

With regards to the advised channel, there has been talk as the market has expanded about how many providers can be accommodated and whether the UK can expect to see consolidation of existing players through M&A activity or groups exiting the market completely. How many players can the market reasonably sustain, particularly as over 60 per cent of the UK advised platform assets are held with the three fund supermarkets? There have of course already been several high profile casualties, with groups such as Amex, UBS, Norwich Union’s Lifetime (now re-built and re-launched as the Aviva platform) and most recently Macquarie’s UK platform exiting the market.

While I am hesitant to draw too much comparison between the UK and other platform markets, M&A activity has been prevalent in more mature markets such as Australia. The Australian banks have developed and acquired wraps over time and are now the dominant players, despite being late entrants to the party.

Depending on your take on the impact of the RDR, the general market consensus is that adviser numbers are expected to reduce post-2012. Some commentators predict we could see up to 50 per cent of advisers shutting up shop for good – worrying figures for new groups targeting a dwindling pool. Couple shrinking adviser numbers with the huge costs of bringing a platform to market and the length of time it can take to reach sustained profitability (which only a handful of current players can claim to have achieved), as an outsider to the market you could be forgiven for thinking that anyone else looking at launching a new proposition was taking a significant risk.

Unfortunately the difficulties do not end there. Recent research into how likely existing platform users are to up sticks and move their clients elsewhere make for grim reading for new entrants. Evidence suggests that advisers are highly resistant to new platform considerations for a number of reasons. According to the research, 44 per cent of advisers are very unlikely to change their primary platform over the next 12 months and a further 43 per cent per cent are “unlikely”. Only 11 per cent believe they are in any way “likely” to actively consider changing their primary platform in the next 12 months.

It is very much a “wait and see” from the adviser’s perspective, unless the incumbent platform commits a series of serious failings leaving little choice. Even the most cost-effective, service-oriented and user friendly new offering is likely to have to bide its time before most advisers express a desire for change. With anecdotal costs of between £600 to £800 cited in the market for any adviser to move a client from platform X to platform Y, I am not surprised that resistance remains high. The following comment has been associated with changing platform: “The process involves huge upheaval. It’s a huge change for both us and clients so we really need to be able to justify it.”

Opportunities

It is not all doom and gloom however. While it is certainly not full capacity at the “platform disco”, you do need to think about bringing some new music. Weak analogies aside, I think there is still an opportunity for new groups to make a successful play in the advised platform market as long as they are smarter than some of their peers have been when it comes to market positioning.

Since the wrap platform became an accepted part of the retail financial services landscape some 10 years ago, received wisdom has dictated that this is a “high net-worth” proposition, fit for more complex client portfolios. However, the reality we see today does not actually fit this picture.

* Ninety-eight per cent of offshore bonds as at the third quarter of 2011 were written off-platform

* The average account size of those retail wrap platforms working with the higher net worth end of the market is only circa £120,000.

* Most fund supermarkets are dealing with client accounts of < £50,000 (and they hold more than >60 per cent of the UK adviser platform market).

* >60 per cent of UK advised platform assets are in general investment accounts or Isas.

Many advisers are actually using platforms for clients who could be classified as the mass affluent. And yet platforms persist in marketing their services to the wealthy, with tiered pricing making this relatively competitive (in basis point terms only) for those with more than £500,000 to invest. Is it time to rethink the positioning?

There are specific propositions in the market which are clearly targeted to larger account sizes. Raymond James, for example, is clear that it targets larger client accounts and is best suited to those running discretionary accounts for clients. With its broking heritage and a relatively large average account size, it is an example of a platform which is clear about a target customer. At the other end of the scale, the re-launched Aviva platform has re-positioned itself as a platform suitable for smaller clients with fairly mainstream portfolios. We think that this is quite bold and it is actually the biggest threat to the “fund supermarkets” we have seen for a while. Aegon UK has launched its ARC proposition to primarily focus on advisers who have clients who are “at retirement” rather than targeting groups by their investable assets.

In all walks of life, to get noticed you do whatever it takes to separate yourself from the crowd. The FSA is clear that a single platform solution is not going to be right for the majority of adviser businesses and this can only play into the hands of new entrants: “We think that it is likely to be very rare, if possible at all, that a firm could use one platform for all clients and meet the independence rule. The [IFA] firm may want to offer different levels of service to different categories of client.”

Clarity about which sort of client each different platform suits is important – and not many platforms today are that good at it. So platforms, be clear about what it is you are offering and be ready for a challenging ride.

Freddie Findlater is head of adviser platforms at The Platforum