The persistent trend of advice firm consolidation is a threat to the growth prospects of adviser platforms, according to a report from investment bank Liberum.
Liberum analyst Rahim Kharim wrote in the bank's inaugural report on the sector out this week (October 9) of a “structural” growth in the advised platform market that has helped companies such as Integrafin, which owns the Transact platform, AJ Bell, and Nucleus to list on the stock market.
But Mr Kharim warned there were a number of “under appreciated” risks to the growth of the platform market, the first being that of adviser consolidation, and that the profit margins currently being achieved by adviser platforms were likely to fall in the years ahead.
The 35-page report highlighted two areas where platform pricing could face pressure.
The first is that platforms will be less able to withstand the general downward pressure on fees in the industry than advisers and fund managers and as a result will be less profitable.
Liberum’s view is that while adviser services and active fund management can demonstrate how they are adding value, a platform is selling a more “commoditised” product, that is, a product where price is the sole consideration for a consumer.
The second issue highlighted was the threat adviser consolidation may pose to platform growth.
The authors of the report wrote: “We see comparatively more pricing risk in the platform market as transparency increases, advisers consolidate and platforms commoditise.
"We analyse the dynamics across the value chain and conclude that advisers will be best placed to maintain pricing.
"We see pricing risk in the asset management industry, but predominantly mix driven, and believe that highly active and alpha generating funds can maintain pricing.”
The report added: “We have shown that this is an industry in structural growth. One risk to this at a macro level is that adviser consolidation continues to a point that it becomes more economical for advisers to set up their own platforms in order to reduce total costs to clients and protect their own margins.
"We highlight this quote from the Nucleus most recent half-year report '... net inflows of £246m, which were below expectations due, primarily, to a combination of the difficult external environment and the impact of increased outflows from a small number of firms that have been acquired by consolidators'.”
That contrasts with the view of Ian Taylor, the founder and chief executive of the Transact platform, who told FTAdviser in September that he can't think of a “significant client” lost to his platform as a result of consolidation.
Ben Hammond, platform director at consultancy firm Altus, said: “It isn’t really that simple for a firm to acquire another advice firm and then move the clients.
"The regulations are clear that for [clients] to switch platform it has to be in the interests of each individual client, and there has to be a process undertaken with each individual client.”