Mark Polson: More signs of upheaval in platform land

I remember a year or two ago someone asking me how long I thought I could keep a business going that’s primarily involved in platforms, because they’re all boring now and nothing’s really happening. I said I thought we were “probably okay for a wee while yet”. And here we are.

Perhaps the most interesting thing is that we have a new entrant. Embark has unveiled its pricing to the world: it’s disruptive stuff. The company has taken its lead from Vanguard and given us an introductory offer – which is surprisingly long-lived for an offer, but that’s how you keep the financial director quiet – of 0.15 per cent for its Isas and general investment accounts (GIA). 

Here’s a bit more detail: 

• It’s a tiered percentage-based arrangement, with differentiated charges for pensions compared with Isas/GIAs. Third-party administration is cheaper still (this is where discretionary managers et al can dump chunks of money for Embark to look after: think Cofunds Institutional).

• For an introductory period customers will pay 0.25 per cent, tiering down to 0.15 per cent for pensions and 0.15 per cent for the other wrappers. This offer is open until the end of next year and is then locked in for the lifetime of the investment. 

• After that, the pension will cost 0.275 per cent, tiering down to 0.20 per cent, while an Isa/GIA will start at 0.20 per cent and drift effortlessly down to 0.15 per cent.

• Fund trading/rebalancing is free. Stockbroking charges are 0.07 per cent a trade (so buy or sell) with a £7.50 minimum and £120 maximum, or £1 per rebalance within a model.

It is still early days for Embark, and some of the functionality you’d expect from a fully fledged adviser platform isn’t there yet. For example, it isn’t hooked up to FNZ’s X-Hub, which provides access to all the model portfolio stuff available on Standard Life Wrap or Zurich’s platform. Nonetheless, 0.15 per cent is a steal.

Embark has openly stated that it is targeting a core market of between £25,000 and £150,000, so we should probably look at how it measures up there. 

For those who are turning up their noses, you might do well to remember that average on-platform pot sizes are smaller than many might think. Take away the outliers – those with a Sipp specialist heritage and those who specifically target high net worth individuals – and the mode average is something not much higher than £100,000. 

Table 1 shows a mixed wrapper portfolio (50 per cent pension, 25 per cent Isa, 25 per cent GIA) with a 10-fund model portfolio that rebalances quarterly to correct a 2 per cent drift. For a £100,000 mixed portfolio, pretty much the platform market centre of gravity, Embark is around half the market rate. Not just a few basis points – half the market rate.

Cost considerations return

We were therefore forced to think again about price in the platform market. It’s such an interesting dynamic. We looked – admittedly a couple of years ago – at all the times platforms have made changes to their pricing model, and in almost every case when a platform cut its charges, its flow has decreased. That is to say, there was a close-to-perfect negative correlation between price and new business.

You could argue that price-cutting is the mark of desperation, and there might be something in that. We would probably find a different outcome if we ran the numbers again today – albeit we would need to strip out pension freedoms and rising stockmarkets to control for external factors. But we certainly do not see price as a key marker of new business flow – outside of unpublished special deals, of course.

But Embark is betting that this can and will change, and I think it might have a point. If we look at the figures for Alliance Trust Savings (ATS), we see a proposition that is radically cheaper than the market for larger portfolio sizes – it is clearly aiming at a different segment than Embark. Of course, it’s the fixed fees that do it for the UK’s most northerly platform. 

Now for some time advisers have discounted ATS on the basis that it hasn’t had certain areas of basic functionality (switches, models) that it requires to run their business effectively. But ATS is now through its re-platforming, and although it’s had some servicing woes, we are told by a few firms that things are starting to look up. 

Therefore, if you are an adviser using, say, a platform at 0.35 per cent for your clients, and an alternative is available at 0.2 per cent for your £100,000 clients and 0.09 per cent for your £1m clients, do you have to consider them?

Well, in one sense you don’t have to do anything: you’re big, strong boys and girls. But returning to last month’s theme for a moment, we have a regulator which, for the first time, is really starting to flex its muscles as a price controller. That isn’t explicit in its remit, but the duck test is very relevant here (if it quacks when it’s alive, and tastes good with orange sauce when it isn’t…). 

Assuming that Embark and ATS can offer a satisfactory level of service – and, yes, I know that’s a big assumption – why would you expose clients to nearly double (or more for single wrapper clients) the price for holding the same stuff? 

Market shake-up? 

My observation is that price alone will not disturb the market. But price, allied to a level of service that allows an adviser firm to operate with tolerable efficiency, even if it is not the best out there, could disturb things. 

We are seeing this already with the level of deal-making in the sector: I’m routinely seeing deals of 0.2 per cent done for medium to large books of business, and mid-teens is not fantastical. But the unlikely bedfellows of a rejuvenated ATS and a brand new and shiny Embark may well start to move things faster than many would think.

It’s at this time of year that I am (grudgingly) allowed by the Editor to mention our 2017-18 advised platform guide, which is available at www.langcatfinancial.com/publications. 

To close things off, here’s a quick stat attack:

• Adviser platforms now control in excess of £365bn – the total market is just under £500bn.

• That’s up 25 per cent on last year. Pensions, hey?

• The average client portfolio (not per wrapper) is £139,000. 

• The largest average portfolio size on a platform is £420,000. 

• Some £253bn of that £365bn is in flight due to re-platforming. 

• The top three platforms control 36 per cent of net flows, and they are all vertically integrated.

So gird your loins, prepare to deck the halls and we’ll see you for a post-Christmas spectacular soon.

Mark Polson is principal of platform and specialist consultancy the Lang Cat