Have you ever noticed how humans are attracted to round numbers? We ooh and ahh when a platform business goes through 10, 20, 50, 100bn of assets under administration. But we are unmoved at nine, 19, 49 and 99bn. This is just one of the reasons why we can’t be trusted.
All that said, this is my 50th column for the august organ that is Money Management, and I think we can all agree that this is a highly meaningful milestone. I haven’t had my gold watch from the editor yet, but I assume it’s in the post.
It’s tempting, at a point which is marked by round numbers, to do a retrospective of the past 50 columns, but on the off chance that you read them you’ve already suffered once and it seems cruel to put you through it again. Plus it would be a criminal waste as we have so much going on to talk about.
Standard Life
First of all, I can’t let the proposed sale of the Standard Life (SL) insured book to Phoenix go by without comment. The 200-year-old behemoth has just been killed by the entity it brought into the world in 1998. Bloody millennials, eh? You feed and clothe them, and the minute they turn 20 they stick a spear into your side and sack you off to a zombie insurer.
On a related note, The Fisher King is a good tale. (Look it up!)
I worked for SL for a little while; something I think neither of us enjoyed that much. But I am an Edinburgh boy and this is arguably the last of the great Edinburgh institutions to go the way of all flesh. And that’s what’s happening, no matter how many corporate videos poor Barry O’Dwyer gets forced to do. It’s a sad moment. Edinburgh, as many of you will know, is a village, and this kind of thing has repercussions well beyond the stuff that gets reported.
There are a lot of very emotional people knocking around the New Town at the moment. The internal language of staff being ‘retained’ or ‘disposed’ doesn’t help.
Phoenix may well do a decent job of administration, but companies always revert to what they know – what’s in their DNA. What Phoenix knows is radical cost reduction, service commoditisation and asset-stripping. The idea that SL will have a saleable workplace and retail proposition that has yellow and blue out front and Phoenix in the back is, as the weeks go by, getting harder and harder to swallow.
But perhaps it doesn’t matter. We’re all hard capitalists here. Back books are for losers, and it’s all about the new stuff. Staberdeen keeps Wrap, Elevate and Parmenion – because three platform architectures are better than one – as well as 1825 and of course the asset management business.
More importantly, it gets oodles of money through the door before the back book decays into nothingness as a result of pension freedoms. And most importantly, it gets to run a big chunk of Phoenix money through Aberdeen Standard Investments (ASI) and probably gets to retender for that £109bn of Scottish Widows money, which flounced off in a cream puff the other week.
I suspect the billions that have just come in through the door won’t just be redistributed out to shareholders and the hungry, huddled masses sheltering from the spring drizzle in St Andrew Square. I’d expect some kind of acquisition pretty soon – both Martin Gilbert and Keith Skeoch, joint chief executives of Standard Life Aberdeen, are dealmakers and they’re flush right now. [SLA duly agreed to buy 50 per cent of Virgin Money just as Money Management went to press.]
I’ve always liked Maslow’s Hammer hypothesis, which is misquoted as ‘if all you have is a hammer, everything looks like a nail’. It’s better described as ‘the law of the instrument’, and what this means is that existing patterns tend to repeat.
In this context, the power of Staberdeen has moved from the insured book to the asset management business. And when you’re an asset manager, the world looks like pools of assets you can manage: icky stuff like managing clients simply gets in the way.
If that’s true, then it’s hard to avoid the conclusion that platform businesses and 1825 exist as mechanisms to drive asset flows into ASI and nothing more. That’s not a bad strategy in itself: plenty of vertically integrated businesses do it successfully – just ask St James’s Place.
But the problem is that 1825 isn’t doing the job effectively. Only 19 per cent of its model portfolio holdings are in ASI funds, and additional MyFolio flow is hardly worth the frankly brutal ball-ache of running an adviser consolidator.
The problem here is that few of the many firms who support SL’s platform stable signed up for this. They also didn’t sign up for a hybrid administration model across whatever it is the new business looks like (it seems Phoenix will administer some of the SL products that sit on Wrap).
If we take a step back, what we observe is that SL, every decade or so, tests the nerves of advisers with a big strategy change that challenges something fundamental in their business. When this goes well – the removal of initial commissions, the repricing of the back book, the introduction of Sipp and Wrap – then it’s a bit like Apple removing physical disk drives from laptops. Folk have a moan and then get on with enjoying their MacBook Air.
But when it goes wrong – ah, well that’s another matter.
If you’re an adviser reading this you shouldn’t do anything yet. The deal hasn’t even happened. If SL, Elevate or Parmenion was the right choice yesterday, it is today. You have to wait and see.
Other agenda items
So much is in flux just now in the platform sector. We have a rash of platforms heading for corporate activity of one kind or another. After Aegon’s taking of Cofunds – and we’ll soon start seeing the proper migration of adviser assets, which will be a fascinating moment – we’ve seen more interesting moves in the past few weeks than in the past five years.
Transact’s initial public offering (IPO) has gone well, and the valuation achieved by Peel Hunt of £650m for the business ended up being bang on – many thought that valuation was way too aggressive. Yon lads with the nice wristwatches and chalk-stripe suits may know something after all.
The Transact IPO needed to happen: there are founders in there who are old enough to tour with the Rolling Stones and they have been the very definition of patient capital. It’s a great success story, and given that the amount admitted to the market isn’t too high, the hope is that it can avoid some of the short-termist pressures that can bedevil listed long-term savings and investment businesses.
And where there is one, there is more. AJ Bell is going to have a shot, and Nucleus looks like it’s thinking about it too. With valuations of £350m and £100m respectively, that’s more than £1bn of platformy goodness hitting the capital markets in 2018-19.
It’s important to say that all three of these businesses have strong franchises, are profitable and well-run. Not everyone loves them, and they don’t get everything right, but we hear more good than bad about all three. The banana skin here is about franchise. This affects Nucleus more than the others, I think, though Transact may also be affected. If the shareholder register for these businesses is diverse in nature, and there is no undue influence on firms who place business with them, then we’re all good.
But if, for example, we see a move from an insurer, be they South African or other, to snap up a major stake in a listing platform to springboard its own vertical integration aspirations and ‘capture distribution’ (this is how big providers still refer to the advised market) then there is literally nothing to stop advisers voting with their feet.
Did I mention?
I’ve enjoyed writing this month’s offering. Too often in the past four-and-a-bit years it’s seemed that the platform market was in stasis; waiting for something. Maybe it was Transact’s move; maybe it was just pension freedoms, Mifid II and GDPR washing through the system. But I think we’re in for an exciting time over the next 12 months or so.
Or maybe it was just the excitement of me reaching a round number of columns. Yep, it was probably that.
Mark Polson is principal of platform and specialist consultancy the Lang Cat
