PlatformsOct 26 2015

Industry braced for pick-up in mergers

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Ask clients what they are looking for from an investment platform provider and the vast majority would, quite reasonably, consider stability and reliability as basic hygiene factors.

Decades of industry stability prior to the RDR means the idea that a major provider might stop serving them is unthinkable.

But waves of regulation and legislation, combined with an historic reluctance to change, have left industry stalwarts questioning whether they now have the strength of stomach, or depth of pockets, to hang in for the long term.

This should not be a surprise. In the next three years, the industry will have moved decisively from product to platform, from fund picking to central investment propositions, from opaque bundled charging to transparent pricing, from hard commissions to adviser charging, from fund rebates to clean fees, and increasingly from annuities to drawdown.

The only way to compete is by consistently delivering a service that people want at the price it is advertised at. For some, the scale of investment to deliver this is substantial, particularly if they have not yet adopted modern IT infrastructure.

And there is more to come. With the second Markets in Financial Instruments Directive and the consultation on pensions tax relief likely to demand even more investment, the attractiveness of the platform market may wane further in the eyes of providers still recovering from the RDR hangover.

But while some may look back fondly to the ‘good old days’ of bundled pricing and packaged products, these changes have undoubtedly improved the quality of our industry greatly and the client outcomes delivered.

Likewise, the exit of platforms that are simply uncompetitive will be of no great loss.

What we are seeing is a process of Darwinian natural selection. Only the fittest will survive, given the finite size of the market opportunity.

It is also worth reflecting on Darwin’s key criteria for success. Not size, strength nor intelligence, but the ability to adapt. It is here, perhaps, that we can see the greatest differentiation in the marketplace.

The pace by which providers have embraced adviser charging, unbundling, transparency and changing adviser models is a key indicator of their ability to adapt and evolve.

Whether driven by resource constraints or a wish to hang on to additional rebate-based revenues as long as possible, those platforms that have delayed progressing their models or have gone for a minimum-compliance approach may well find the cost and/or business strain of trying to catch up just too high.

If we consider other, more mature platform markets such as those in the US and Australia, there is a distinct shape to consolidation.

The first stage is the consolidation of new business flows, the second is platform stagnation, the third is mergers and the final stage is platform exit.

If we apply this model to the UK market we can see that consolidation within the adviser platform industry started long before the recent corporate activity.

We are seeing some platforms flourish, while others struggle to grow new business flows and find capital to invest.

We are also seeing platforms diversifying their strategies away from the advised market, with more flows coming from the workplace and direct.

These early and largely benign phases of consolidation will eventually make way for something altogether more disruptive for advisers and clients.

There are currently more than 30 platforms in the UK market. We can expect this number to have halved by the end of 2018, with perhaps as few as six platforms supporting the requirements of advisers.

This reduction will play out in a number of ways. Some platforms will change their focus. There will also be more fettered and ‘robo’ propositions focusing on the workplace and direct markets.

Over time, the capabilities of these platforms will diverge from those supporting ongoing advice.

Advisers should also be prepared for platform exits. Some businesses will be so unappealing that their owners may choose to cut their losses and leave without being able to find a buyer.

Advisers should guard against the impact of any corporate action on their business and clients. The first step is identifying whether the platforms they use have committed backers and are prioritising their requirements.

Mike Hogg is head of platform strategy at Standard Life

Consolidation: expert view

Mike Hogg, head of platform strategy at Standard Life, analyses in more detail what shape platform industry consolidation may take:

“There will be platform mergers, but not many. There are simply not enough buyers and too many barriers to migration and integration.

Some buyers may end up taking on a loss-making business with significant development requirements. This may be lessened where platforms share underlying technology, but even then it is difficult to see much buy-side demand unless prices are deeply discounted.

Platform sellers have to accept they are selling struggling propositions with limited appeal. The transactions that do happen will be driven by owners wishing to cap their liabilities.”

Profitability: expert view

Abraham Okusanya, founder and director of FinalytiQ, says advisers with clients on loss-making platforms should consider drawing up contingency plans:

“Profitability is crucial and should play a key role in adviser due diligence and selection because the financial resources of a parent company just aren’t enough. Even big providers with deep pockets won’t continue to fund loss-making platform subsidiaries forever.

Eventually, shareholders will ask questions, big businesses will get reviewed, bean counters called in, restructuring happens and loss-making platforms are at risk of being axed by their parent companies. Only when the tide goes out do you discover who’s been swimming naked.

According to the latest FinalytiQ platform profitability report, nine out of the 23 advised platforms examined are loss-making, compared with seven loss-making [firms] in the previous year. While assets under administration increased by 20 per cent on the previous year, pre-tax profits fell by a whopping 72 per cent.

Going forward, advisers with clients’ assets on perpetual loss-making platforms should at least have contingency plans in place, or model the likely scenarios in the event of a provider exiting the market or shutting down. What’s the likely cost of migrating assets? How will you ensure that clients are informed and reassured?”