The business is now led by Richard Rowney, whose former role was at pension provider LV, while its chair is Gordon Wilson, who is also a board member at Interactive Investor, a retail-facing platform that has engaged in several merger and acquisition deals in recent years.
Nucleus was one of a number of platforms that entered the adviser market without any direct ties to life companies.
While many embraced a change of ownership or control in recent years, it is arguably shareholders and staff at Nucleus that have endured the most turbulence – initially floating on the stock exchange in 2018 before being acquired by the private-equity owned James Hay Group, and then being majority sold to HPS.
One of the problems with the legacy Nucleus business is they didn’t really have a unique selling point. They were reasonably priced, and well liked by advisers, but there is no doubt they needed to evolve.Ben Hammond, AltusThe company’s view is that the next stage of its growth will involve working with clients who are at the retirement stage of their lives. This fits with both the James Hay deal and the pending £242mn acquisition of Curtis Banks
Historically, many clients reach this stage and exit platforms as they purchase an annuity.
Ben Hammond, platforms director at Altus, says: “It may have been that in a lower interest rate environment, with low annuity rates not being that attractive, this wasn't something platforms had to worry about, but with higher rates, the focus is very much on keeping existing clients on the platform for longer, with decumulation and flexi-drawdown strategies.
"It may be that combining the James Hay product range with the existing Nucleus products does give them a USP. From a business point of view, there is also the potential to achieve cost savings from bringing the products together, but with the replatforming still to do, it could take years for those to really come through.”
Private equity firms have been attracted to platform businesses due to the latter’s high levels of recurring income, which the PE firms could acquire cheaply by taking advantage of the previously prevailing low interest rate environment.
Recent higher interest rates do not just mean the borrowing costs for the private equity firms have risen; 2022 was also a year in which tighter monetary policy contributed to stark falls in both bond and equity markets, driving down the assets under management of the platform, and so also the income of the platform providers.
That may be an issue for many private equity-backed businesses, but Nucleus's last set of accounts showed not only that it had cash in the bank but also no bank debt, indicating it started from a stronger position than many at the start of the interest rate rising cycle.
Prior to its recent M&A activity, the company reported assets under administration of just under £20bn, and profits of around £2m, the latter number being too small to enable the firm to embark on the technology upgrades and other initiatives that it needs to embrace in order to benefit from greater scale.
A long-running issue in the advice market is that it is often a lengthy process for advisers to switch clients to a new platform, which means growth in recent years has largely come from the expansion in the total number of clients and from portfolios growing in line with rising markets.
The other challenge for platforms is the difficulty of moving between providers, as doing this can take up a lot of advisers' time, and they cannot bill a client for it.
Hammond says: "The issue of making it easier for advisers to move between platforms has been around for a long time. One of the issues is that if an adviser wants to move, in most circumstances for regulatory reasons the adviser needs to speak individually to each client of his or her advice firm to explain the rationale for moving.
"That is obviously very time-consuming for the adviser, and then they have to embark on the technical work to make the changes. That is a lot of time and resource, and it does have the effect of meaning advisers don't readily change platforms.
"One of the problems with the legacy Nucleus business is they didn’t really have a unique selling point. They were reasonably priced, and well liked by advisers, but there is no doubt they needed to evolve. The assets growth of the Nucleus platform in recent years has come from the acquired businesses. ”
But Nucleus's problems run deeper than market turbulence. As far back as 2019, David Ferguson, the founder of the company, highlighted how consolidation among advice firms was contributing to higher outflows from his business.
Ferguson essentially co-founded Nucleus in conjunction with advisers who became shareholders, which meant the platform may have been particularly vulnerable for having an older cohort of advisers in its business. And it is firms run by older practitioners that are more likely to sell to a consolidator.
What next?
The acquisition of Nucleus by James Hay turned the £19.8bn of assets reported in the most recent set of accounts into a figure which as of today is £43bn, and if the Curtis Banks transaction is formally approved this would take the assets under administration of the combined group to around £80bn.
Central to Nucleus's communications around the company’s strategy is that it needs to have the advantages of scale in order to invest for the future, with around £5mn targeted to be spent on what the company believes are improvements to the platform since 2021, and an overall target to have spent £8m by the end of 2022.
Funding for this may have been aided by the £19m of “cash or cash equivalents”, the Nucleus Group had at the end of the 2021 accounting period.
In Nucleus's most recent set of published accounts, which cover the period to end of December 2021, the company reported assets under management of £19.8bn (excluding James Hay), which represented an increase of 13.9 per cent.
However, the company’s strategic report highlighted that this has been achieved at a cost, with the yield per customer declining, partly as a result of wider pricing pressure in the industry, but also as a consequence of the company’s tiered pricing structure.
This means the percentage charge paid by the client falls as the size of their portfolio rises, and amid the stout market rallies of recent years a greater proportion of Nucleus clients entered the cheaper fee tiers.
Profit for the period was £2.8m for the year to the end of 2021. Nucleus declined to comment for this article.
Growing pains
There have already been bumps in the road as Nucleus has attempted to grow beyond its roots as a platform.
The company launched a model portfolio service in 2021 but announced it was winding the range down in 2022.
FTAdviser understands one of the issues with the model portfolio service was that advisers were reluctant to move client assets into a newly launched service at a company that was for sale.
In the end just eight advice firms were clients of the model portfolio range, according to Nucleus. It was also launched just as the management of the company was changing, and with that came a change in priority, with the new pivot being towards the retirement end of the market.
Nucleus was among the first standalone platforms to enter the UK market and attempt to compete with the incumbent life insurance companies.
But as the model it and its peers deployed has been challenged in recent years, Nucleus's ability to navigate the new terrain of the platform universe will impact all advisers in the coming years.
David Thorpe is investment editor of FTAdviser
david.thorpe@ft.com
