InvestmentsJul 22 2016

Platforms: Constant development

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Platforms: Constant development

The platform industry has taken great strides in the past few years. It has had to deal with regulatory changes and an upheaval of the pensions industry, but the end of change is by no means in sight.

Rumours have been rife in recent years that consolidation would be the key continuing theme in platforms. Finally, in September 2015 it was announced that Aberdeen Asset Management was set to acquire Parmenion in a move the fund house said would help accelerate its “digital ambitions” and augment its investment solutions business.

In May, the first major piece of business was completed to combine two platforms when Standard Life bought AXA’s Elevate platform for an undisclosed sum.

Barry Neilson, business development director at Nucleus, does not predict a significant amount of consolidation in the market any time soon due to the difficulty in bringing the differing propositions together.

Mr Neilson said, “We can not see continued consolidation of significant magnitude. It is more likely that we will see a change in ownership with external participants like fund managers being the main suitors, such as Aberdeen’s purchase of Parmenion.”

Steve Levin, chief executive officer of investment platforms at Old Mutual Wealth, agrees. “While there has been recent M&A [mergers and acquisitions] activity among platforms, I do not think we are about to see a spate of consolidation because it is not a simple exercise.

“It might take 18 months or more to integrate different platforms, even if the technology is the same, as the fee structures and tax wrappers need to match up.”

The rise of robo advice

Another area of platforms that has been taking up many column inches in recent years has been the rise of robo advice. While there is still not a huge market, it is still relatively unclear just what exactly it is.

Essentially, a robo adviser is the same as a direct-to-consumer (D2C) platform except that it simply offers advice rather than guidance. The biggest concern is the safety of the algorithms and whether or not consumers will take the so-called advice seriously rather than assessing the risks involved with listening to machine rather than a human.

The way many industry commentators talk about robo advice suggests the robots are taking over the country and regular face-to-face advice and platforms, as we know them, are under threat – and the press is guilty of this scaremongering too.

However, according to the lang cat’s most recent report looking at direct platform investing in the age of robo advice, Come and Have a Go: Rise of the Machines, D2C platforms had roughly £132bn in assets under management (AUM) in 2015.

This is more than double the amount Deloitte estimates that the 11 leading US robo advisers held at the end of 2014 (£60bn).

As it stands, robo advisers in the UK stand at approximately £150m. A quick glance at Table 1 will show how small this is in comparison to the platform market – Praemium, the platform with the lowest AUM has £874m under management.

The Table shows the platform industry has £312.7bn AUM. This is a drop on last year, which is undoubtedly due to fewer responses from this year’s survey, as platforms including 7IM (2015: £9.5bn AUM) and Aviva (2015: £6.7bn) failed to respond to this year’s survey.

As with any Money Management survey, the form is sent out to be completed within a month – and, despite numerous deadline extensions, some platforms still failed to return it on time. We hope to see all respondents back in next year’s survey.

Covering all options

This year’s survey covers 19 different platforms and looks at a range of options. Table 1 also details the total AUM the number of clients and the average per account – giving a rough idea of the typical client on each platform as well as the client retention rate. Cofunds remains the largest platform in terms of assets, with £76.9bn, and FundsNetwork runs close behind with £62.7bn.

When it comes to the number of clients, Hargreaves Lansdown’s Vantage platform has the highest number of clients, with an estimated 813,000 as at 30 April 2016. This is unsurprising, as it is a D2C platform with 90 per cent of clients non-advised. The average pot for the platform is also one of the lowest among all respondents, with an average £70,603, which is much lower than the average £168,178 across all in Table 1.

As with previous years, many providers do not specify exactly where all their money has come from, so it is unclear how much money is held with institutional clients.

Table 2 looks into platform access, giving an idea of the type of client on the platform. All platforms are available for advisers, except survey newcomer Charles Stanley Direct and Vantage, which are both available on a D2C basis.

While there has been a rise of D2C availability in the market (10 out of 19 survey respondents allow direct clients, one up from last year), advisers still have a wide range available tailored to them.

There is still some debate over how many platforms advisers should be using, and whether one is enough for their clients. For Steve Owen, head of proposition at AXA Wealth, there is no one answer.

“And quite rightly so, it depends entirely on an adviser’s business, how they run it and the types of clients they choose to work with,” he says.

Pros and cons of the single platform

There are pros and cons to using just one platform. Alistair Wilson, head of retail platform strategy at Zurich, says that while many see this as a positive, it may be a necessity. “However, managing a large number of platforms in a business will be challenging. This will increase the risk for advisers and, ultimately, for clients with assets held on them.

“If you consider the variety of options that are now available for clients in retirement, and the fact that they are likely to remain invested on platforms for longer, platforms need to get the basics right for delivering income – otherwise clients may find that they don’t receive their income when they expect it.”

Old Mutual’s Mr Levin says platforms can help generate efficiencies that benefit advisers and their customers.

“Advisers must be able to demonstrate that the platform/s they select off of the services and administration capabilities are appropriate for the adviser’s business model.

“This includes looking across their client segmentation structure to ensure the derived benefits meet the needs of their customers,” he continues.

“The FCA is not prescriptive in the number of platforms advisers can use, but it is clear that good client outcomes and a culture of challenge should be at the centre of the decision-making process.”

Table 3 shows each platform’s charges. From 6 April 2016, the FCA’s ruling regarding how the platforms should be paid for the assets that they hold came into effect.

This clause, which many have named the “sunset clause”, means any change to legacy business requires platforms to have access to clean shares classes or have the ability to pass on contributing payments in full by small cash or unit rebates.

The clean share classes should have a lower annual management charge than previously, and will also exclude the portion of the fund that was rebated to advisers in the past, but was banned when the Retail Distribution Review (RDR) came into play.

Many platforms made the change to clean, unbundled share classes years in advance, so have not been deeply affected by the changes this year.

Table 4 also looks into funds available on each platform. It details how many funds are available as well as the types of wrappers and product types available on each platform. Investment trusts and exchange traded funds (ETFs) have traditionally been difficult to access on a platform, but now all but two platforms have both available – Cofunds and Old Mutual Wealth have yet to make the move. Only Praemium and Transact offer all of the product types.

Table 5 details the cash accounts for each platform. Over the years, there have been some simple changes, but there have not been any changes that stand out since last year’s survey.

Regulations and restructures

While platforms have seen regulatory changes of their own in recent years, other products have undergone restructures that could indirectly affect platforms, such as the pensions freedoms that were introduced last year and a new Isa (the Lifetime Isa) has been launched.

“While it may be debatable whether any of these changes enhances the platform end user’s experience, they do create significant regulatory or legislative development cost pressures on the platform provider, and are creating significant challenges and opportunities for adviser firms,” says Alastair Black, head of financial planning propositions at Standard Life.

The pension freedoms in particular have meant platforms have had to develop their functionality and business support services to help advisers deal with the increase in demand on their time.

Mr Black adds, “This comes from not just an increased volume of business, but a significant increase in the time per client due to the added complexities of in-retirement advice.

“While the platform market is maturing, it is by no means yet at its zenith.

“The most recent changes – the pension freedoms – create a further seismic shift in the advice landscape,” he says.

Platforms have a critical role in supporting advisers, Mr Black believes, which can create scalable processes that generate the capacity required to deliver consistent client outcomes to an increasing volume of clients that are choosing to continue investing in retirement rather than to annuitise.

Change of pace

Zurich’s Mr Wilson thinks the change of pace within the platform market is continuing.

“With a number of platforms needing to improve and modernise their technology (re-platforming), their ability to focus on further changes could be impacted.

“It will be interesting to see how advisers and their clients react to platforms that are slow to adapt or fail, and make available new financial planning opportunities,” he adds.

While the sunset clause only came into force this year, it is still unclear what effect it will have on platforms – if any. It may also have no direct impact on advisers who are now using platforms for more than just funds.

Platforms now need to be constantly developing to adapt to what advisers need – and want – particularly post-retirement freedoms.

There are also rumours about more consolidation in the market, so next year may see fewer platforms on the market.

The platform market looks very different from how it was 10 years ago, and it will undoubtedly be developing into a completely different space over the next 10 years.