Nearly 20 years since their inception, there are now some 30 platforms in the UK market and this has generated some anticipation that the industry will consolidate.
This is largely based on a perception of falling margins, some unimpressive prices at which ownerships have changed, some outright withdrawals from the market, and perhaps, the fact that a number of platforms use the same underlying technology which makes mergers a pragmatic possibility.
Peter Mann of Skandia, last November, said that he sees consolidation as less likely than modest growth in platform numbers. But the market is changing and will continue to do so.
The leading platforms will be the ones that are constantly adapting, the ones that can separate themselves from the pack and position themselves successfully for the future of financial services.
In order to fully understand what the future might hold for platforms, we need to look at the drivers behind their business. Fundamentally these are the needs and aspirations of advisers, and the clients that ultimately use their services.
From the advisers’ perspective, quality of service and breadth of offering take the lead over price. They are wrestling with compliance demands, administration considerations and the suitability issue, they need the platform to support their methods of doing business.
From the clients’ perspective, pricing has become much more visible and will continue to do so.
Currently market comment continues to be dominated by the negotiations on clean share classes. For platforms, this serves as a distraction from the focus on their future development. The creation of several different share classes, each with varying fees attached, will probably, ultimately, lead to confusion in the minds of investors.
It may also seriously complicate the ability for a client to switch assets from one platform to another.
An unintended consequence of the clean share class negotiations has been to highlight the need for distinctions between execution-only and advice. Deeper discounted funds will presumably end up being marketed more prominently. This could adversely impact consumers’ broader investment decisions.
The platforms of the future are dealing with these short- and medium-term distractions but many are busy looking at the bigger picture. For advisers and platforms, it all starts with the client.
While a limited number of high net worth investors will always require and pay for a full service, as time goes by, there will be growing numbers of investors, at all levels of wealth, wanting to kick off the process of sorting out their own financial affairs in a way that’s comparable to other online engagements.
Most clients, whether acting on a referral or not, will almost all nowadays use the internet to begin with, either by themselves or with other family members, just to get some key background information on an advisory firm and other options ahead of an initial meeting. In effect they will be searching for affirmation.
Once online, the investing client is generally faced with two options, either the higher cost but reassurance of personal advice, or at the other end of the spectrum, the less pricey, less shielded execution-only route. Either way, they will all use a platform to execute the investment strategy.
An advice option in the background, as a support to tap into as and when it is needed, could prove extremely popular among investors.
From the adviser’s perspective, their long-term future and increased profitability lies in being able to provide services efficiently along the line between full advice and no advice.
If advisers can move between full face-to-face advice to remote advice with on-line interaction, they will be able to service a greater number of clients, with a lower fixed cost.
Their revenues in turn, will be more stable and predictable. This will result in greater business value building up within their firm. The evidence for this in the current market is made clear by considering the profitability of the large execution only providers, who are estimated to be making net profits of 40 basis points per £1 invested, compared to the professional advisers who are failing to reach half this figure.
The platforms of the future are the ones which can support advisers to grow their margins in this way. Platforms, since their inception, have been highly innovative. The flexibility they can offer advisers to service clients in different ways, will be the test of their survival.
Nicola Robinson is manager, corporate department at Parmenion
