The oozlum bird, as the poet once wrote, is a curious bird, and also mighty wise. For it always flies tail-first, to keep the dust out of its eyes. The oozlum bird is also rare. The reason for this is that if it ever turns left – as we all must do in life – it will fly in ever decreasing circles until it disappears up its own fundament.
The oozlum comes to mind when thinking about platform sustainability. Many providers in this space do seem to be flying backwards, and while that may keep the dust out their eyes, it isn’t very aerodynamic. And just when you think they might have worked out that forwards is better than backwards, or is commonly supposed to be, they turn left and start that ever decreasing journey.
What we’re really talking about here is the platform industry’s (in aggregate) inability to make money. A recent study by the consultancy firm Altus found that average effective yields had fallen from 0.8 per cent in 2006 to 0.4 per cent in 2011. And with pricing continuing to tighten, the news is not good for those charged with guarding the profit and loss sheets.
To look at a case study, one could do worse than think of Macquarie. Now, there was no shortage of capital in that business. The Australian giants simply decided they couldn’t make the return on capital required and pulled the plug. The UK management team had to ensure an orderly wind-down (this is part of the stress-testing the regulator does with providers), and assets moved to whichever new home the adviser selected. The industry, behind the scenes, actually pulled together fairly well to make that happen. There were problems, annoyances, time was wasted and tempers flared, but in retrospect it could have been worse.
What we are really doing when we try to work out who is here for the long haul is assess covenant. Covenant is something that anyone who’s worked with trustees and employers in ‘defined benefit’ knows all too well – the level of commitment the sponsoring employer shows to keeping the scheme well-funded. That’s what providers of capital to platforms show when they pony up another £20m of development spend. So the real question is, how strong is the covenant of those businesses? That’s hard to answer, but here are two points to consider:
• Profitability isn’t the same as getting your money back. If you’ve spent £100m building a platform, being marginally profitable on £10bn of assets isn’t all that exciting. Don’t get confused between making a buck and covering the cost of development.
• For some, that might not matter. The legacy systems these companies use for pensions and investments are creaking badly post-RDR. They can’t deal with adviser charging. Certainly open architecture would cause them to turn sharply left. These systems have cost tens, maybe hundreds of millions spanning many years. Taken in that context, platform expenditure might make more sense.
A final thought. It might be that platform operators don’t matter. If ABC platform exits for whatever reason, you can move to DEF, or GHI. Sometimes those platforms might even share a custodian, or underlying technology. But here’s another risk here. What if those technology firms, or custodians had an issue?
It might be that we have been measuring the wrong thing all along. There are systemic risks in the platform market, but they aren’t necessarily where you think they are.
Mark Polson is principle at The Lang Cat
