At present, there are over 30 platforms operating in the UK adviser market with over £225bn under administration. With the retail distribution review now implemented and the FSA’s (now FCA) platform reform paper CP12/12 close to finalisation, what does the future hold for the UK platform industry?
Over recent years platforms have significantly improved their efficiency, functionality and usability. This has led to increased popularity in the adviser market as firms have turned to platforms for full administration services instead of retaining their own unwieldy and potentially risky administration services.
In addition, the buying power platforms have developed with fund managers and the more recent addition of stocks and shares as investable assets have also proved to be useful selling points to the adviser market.
The popularity of platforms is unlikely to recede and will probably increase at a greater pace than before, for a few reasons. One rationale for extended growth is the squeeze on adviser margins that is predicted in the wake of the RDR’s drive for greater transparency.
As advisers introduce explicit charging and move to an unbundled proposition, their revenue generation may well be squeezed and many advisers will be forced to review their business model.
Advisers will need to ensure that they are commercially lean and that their core services (financial advice and planning) can continue to be provided at a profit. This will no doubt draw immediate attention to non-fee generating areas such as administration and software that could be replaced by a platform. This option offers a cost-effective solution as well as additional functionality and services.
Some industry experts predict that this will create greater definition between advice (provided by the adviser), and execution (completed by the client themselves). This again is likely to generate new semi-direct platform business.
With this newly created transparency comes a model that does not necessarily allow for larger clients to unknowingly supplement smaller clients. The explicit charging will most likely prevent advisers offering their full advice and implementation service to clients with assets under £250,000 and potentially no service at all to those with less than £50,000. This is likely to create ‘orphan’ clients. This new market segment is likely to generate consumers who will also turn to platforms as an easy way to manage their investments themselves.
In June 2012, the FSA published consultation paper CP12/12, which confirmed its plans to implement a ban on all commissions paid by product providers to platforms on advised and non-advised business, along with the ban of all cash rebates paid by product providers directly to consumers.
The theoretical rationale behind the CP12/12 is to clarify the role of the platform and extend transparency with respect to the cost of investing for the end consumer, whether advised or non-advised. In the same way that the RDR has resulted in the need for wholesale changes to many advisers’ business models, this is likely to have the same result for most if not all platform providers.
In reality, some platforms could be forced to operate two separate business models, or even three in the short term.
Fundamentally, this approach would challenge any business to maintain efficiencies, particularly if those efficiencies have only recently been realised.
Over time, assets held in model 1, which remain bundled share classes will naturally dwindle, and model 2 using semi-bundled share classes will be ruled out in 2016, but establishing how quickly this may happen will be an important part of the segmentation process. This will leave model 3 with clean share classes.
Some platform providers may decide to operate in solely post-RDR models if their existing business models are sustainable without rebates or commissions. This may sound like a good idea but establishing how to transition legacy clients with little impact is likely to provide the biggest challenge the UK platform industry has ever faced.
While asset growth across the platform business is expected, it is equally likely that the number of active platforms operating in the future will reduce. When you consider that the top seven platforms currently administer around 75 per cent of the total market, this suggests that the remaining 25 per cent spread among 25 plus platforms is simply not sustainable.
The platform industry is still at its core an administration service and, like most services of this nature, is built on scale. With the impending regulatory changes and the corresponding costs, this particular aspect is likely to become of even greater importance.
Interestingly, some of the new entrants to the market have defied the theory of participant shrinkage and those entering with a strong existing retail brand and access to existing distribution are unlikely to be put off.
Other such entrants could also include the likes of Google and Microsoft, which would no doubt look to ‘revolutionise’ the online platform proposition through their advanced technology. They would also be able to utilise their existing consumer access to great effect. If this does happen and they commit fully to the proposition, it is something that could change the landscape entirely.
So where does this leave the smaller platforms? The implications of CP12/12 will accelerate the expected consolidation as platforms may elect to close to new business to avoid burdensome and expensive developments, or by placing themselves ‘in the market’.
While there is little doubt that the intentions of the regulator are well-founded – and in the long-term both the RDR and CP12/12 will create a better environment for retail investing – there is also little doubt that the state of flux expected in the short to medium term will create some winners and many losers across the whole industry, including platforms. Who ends up in which category is something that only time will tell.
Russell Andrews is client relations manager of Momentum Global Investment Management
Platform business models
Some platforms could be forced to operate three separate business models.
* Model 1: pre-RDR model, using bundled share classes and allowing for adviser rebates, consumer rebates (cash or units) and platform commissions.
* Model 2: post-RDR yet pre-CP12/12, using semi-bundled share classes where consumer rebates and platform commissions are permitted.
* Model 3: clean share classes with no rebates or commissions or semi-bundled share classes with consumer unit rebates.
Key points
There are over 30 platforms operating in the UK adviser market with over £225bn under administration.
Advisers will need to ensure that they are commercially lean and that their core services can continue to be provided at a profit.
The implications of CP12/12 will accelerate the expected consolidation as platforms may elect to close to new business to avoid burdensome and expensive developments.
