All change – the future of platforms

The reasons are relatively straightforward:

• All business is or will be written on platform, in one form or another. Thus, no platform strategy means no strategy, and that means failure. At the same time, distributors see the attraction of becoming their own platform managers and thus new platforms are continuing to come to market. Examples are Fusion, the award-winning platform from the people behind IFA network Best Practice, and Aon, which acquired the platform of Lorica Employee Benefits.

• All platforms that could exit with relative ease have done so – American Express, Abbey, Macquarie, Norwich Union (first time around). These were rich companies that could afford exit costs and to whom a platform did not appear critical – at the time. The smaller platforms, such as Nucleus, Ascentric and Novia could not afford failure. They had to survive and become profitable – and they have.

• Most markets achieve efficiencies by merger and acquisitions. The fund business in the UK is a large cottage industry, sadly inefficient due to low entry barriers, high margins and low adoption of technology. An outcome of this is the impossibility of swift, cheap reregistration of funds from one platform to another. The internal switching cost is about £40 per customer. The IFA cost is anything from £250 to in excess of £600 per client. It may well take legislation rather than regulation to change this.

The changes in the platform world will most likely not be because of normal business economics, but because they will arise from changes in regulation and legislation – unintended consequences.

The 2014 Budget pension changes will change the industry. We know not how just yet. The retail distribution review will also result in dramatic, unintended, change, the shape of which is now becoming clear.

It was apparent when the new regulation was published that the cost of independence would be too high and that nationals and networks would struggle, especially with no provider income streams in the form of rebates, bungs or bribes.

What was less clear was the impact that unbundling would create. Change was not in a straight line, it went thus:

• Big platforms lost their rebates from asset managers that were rewards for scale advantage.

• To maintain an edge, platforms demanded new cheaper fund share prices from asset managers – so-called extra-clean classes.

• Yet these would benefit customers, not the platform profitability, except that ...

• They could reduce the total cost to the customer, possibly compensating for higher costs elsewhere.

Asset managers did not play ball. Better share prices would only be warranted by volume deals. Platforms, per se, cannot promise volume. However, those with assets in the group can.

IFAs, of course, cannot be a party to volume deals. They cannot guarantee where tomorrow’s flows will go. A restricted firm can. This will change the competitive dynamic.

Perhaps unexpectedly, the restricted proposition looks rosier. Conversations started with volume and moved on to agreements around management information and corporate actions. As one fund manager said to us: “We are no longer talking extra clean at 65bps, we are looking at mandates at 45bps.”

The world of vertical integration looks very pretty now if you are in the right place, that is, a platform with associated funds and the ability to influence distribution. Providers will be looking to tie up more distribution to provide continued fund flows, whether direct to customer or intermediated. Standard Life offers huge flows to SLI funds; AXA Elevate offers great terms on Architas funds. Old Mutual, on the other hand, having seeded its OMGI funds with life company assets, is now buying distribution, namely Intrinsic, Positive Solutions and, most recently, Quilters. How long before they acquire direct distribution?

Distributors such as SBG and Succession have done deals with asset managers and platforms to manage costs and compliance, and to maintain or increase margins.

In the pre-RDR world, the majority of IFA firms were tiny and/or networked. Today, Honister is history, Positive Solutions is part of OMG, SBG is about to become restricted only and the rest of the big boys have restricted propositions. There remains a rump of one- or two-person IFA firms, but most compliance experts doubt their ability to survive as independent, with a few exceptions. In addition, there are more substantial local and regional general IFA firms, wealth managers and financial planners.

It is likely that in five to 10 years, IFAs will be relatively few, as most will have become restricted or merged or acquired. The survivors will be specialists and highly successful, offering financial planning and wealth management to the wealthy and high earners.

This brings us back to the future of platforms. We can make a few assumptions:

• Legislation or regulation will enable cheap, quick re-registration. This will encourage merger and acquisition activity.

• Platforms will be distributors, have distribution clout or will be favoured by a small IFA community.

• The cost of IT falls (Moore’s Law). Successful platforms will focus on requisite features, not all-and-sundry bells and whistles, enabling lower costs (which the market will demand).

Then there are the known unknowns:

• A move from ad valorem pricing to fixed pricing (as with Alliance Trust) would destabilise most pricing models.

• Aggregation away from platforms alters what is required from platforms (look at Sammedia and Sprint Technologies). Much of the current platform functionality is around aggregation, analysis and reporting.

• Compulsory and increased auto-enrolment contributions, plus collective defined contribution pension schemes, could redirect focus to cheap centralised investment and slow the flow to the individual retail sector.

• A major new entrant, with large resources, great IT, and a love of the consumer could cause havoc (think Google and Facebook).

Unknown unknowns:

• The iPad is an example of a product from left field. That said, the iPhone as good as killed off the mobile phone market – as Nokia has discovered – and replaced it with the smart phone.

• How many annuity providers when carrying out their strategic planning exercises in 2013 considered the possibility of the abolition of compulsory annuitisation?

By definition, the unknown is unknown. That said, any industry that is based on IT must appreciate that advances can be both evolutionary and revolutionary.

I will be stupid, and make some forecasts:

• IT entrepreneurs will not go into boring, generally low-margin sectors such as financial services. Elon Musk, after making his millions with PayPal, started Tesla and SpaceX, not a fund business!

• Cost will be king, but brand will normally differentiate. Most start-ups will never achieve scale in time to create brand appeal.

• The basic bits such as custody, back and some middle-office will become cheap as chips and providers will be global.

• International houses will dictate pricing (which will mean both maintaining high prices in certain markets, for example, Europe, and agreeing cheap mandates elsewhere).

• Differentiation will be at the CRM end to provide low-cost mass-market or high-price wealth management products.

• Disruption will be caused by more fixed price/hybrid propositions from platforms, asset managers and advisers.

• The surviving IFAs will need to differentiate to avoid price comparison, which means passive or braver investment selection, for example, boutiques, different asset classes.

Please do not keep this article. Change is rarely as one expects.

Clive Waller is managing director of CWC Research