A couple of interesting comments, which appear to be contradictory, appeared in the press in recent weeks concerning a hot topic – the cost of running a platform.
I say ‘hot topic’ as there is clearly a price war going on in the platform space, and even now the majority of platforms seem to struggle to make money.
The first comment was from Ian Gorham, chief executive of Hargreaves Lansdown, who stated that the cost of operating its very successful and highly profitable platform was 28 basis points (bps) per annum; so 28bps just to reach breakeven on a platform with more than £30bn assets under administration.
The second was from Andrew Power, lead RDR partner at Deloitte, who stated that margins on platforms were due to fall from 30 to 20bps and, if that were the case, the breakeven point for platforms would rise from £20bn to a staggering £40bn – a massive figure that would surely drive away new entrants.
I must say the second comment does not make a lot of sense if you treat the term ‘platform’ to cover all variations in the market, including retail and institutional, advisory and direct.
And that is one of the problems in the market today in that all platforms are treated as the same when in fact, of course, they are not. If both comments are true then the entire platform industry is about to go bust.
My own view is that there is no evidence whatsoever that anyone can run a full wrap platform, including providing the product wrappers, client administration, investment administration etc, for much less than 25 basis points, even for platforms with scale.
I would say that the Hargreaves Lansdown figure of 28bps agrees with this, as in a world of adviser charging, the Bristol-based company also has to pay for its large and effective direct marketing machine to function, whereas with an adviser-based business (like Novia’s) the investor also pays the adviser charge.
The other thing to understand is that once a certain volume is achieved the marginal cost is basically the same as the cost of running the platform mentioned above (as the fixed costs have then been broadly spread already).
Therefore the more business you write at say 20bps, the more money you lose and you never get to breakeven; that is why I struggle with Andrew Powers’ comment above – if you cannot make a profit on £20bn you cannot on £40bn.
So what can a platform do in such a scenario as a price war like the one we are seeing? The first thing, of course, is to cut costs and make the platform as efficient as possible through the use of technology and cutting manual intervention down to an absolute minimum.
The next thing in the face of the price pressure is to evolve the platform and generate alternative sources of revenue.