The long-heralded consolidation phase of the platform market may have started. What does this mean for platforms, advisers and their clients?
Until a few years ago, virtually every platform in the market was dependent on advisers for new clients and assets. The market has been shaped by adviser demand and, even though some platforms have entered other markets, it is this demand that is driving consolidation.
It’s not that advisers are requesting consolidation; rather it’s the pressure applied by advisers that is bringing it about. The criteria used by advisers for platform selection are very demanding and these demands are magnified by the numerous consultancies offering due diligence services to the market.
There is nothing wrong with this. As professional platform users, advisers should be demanding and the resulting market pressure damns complacency and drives value. Regulation and legislation have played their part, too. The RDR; FCA policy statement PS13/1 – Payments to platform service providers and cash rebates from providers to consumers; pension freedoms; and, soon, Mifid II are all placing investment demands on platform owners. However, it would be wrong to say this is a root cause of consolidation.
Rather, it is advisers seeking the best model for their business and proposition for their clients that raises the bar. There is a huge difference between taking a ‘minimum compliance’ approach to regulatory change and embracing the change in a manner that supports advisers. The trials and tribulations of some fund supermarket propositions around PS13/1 and platform unbundling are well documented, but none of these businesses actually failed to comply. This also serves to highlight that scale alone is not a guarantee of long-term success.
Platforms wishing to work with advisers must be able to support their client propositions, which are far from homogeneous. Put simply; 1,000 advisers on a platform means being able to support 1,000 different propositions and business models. This demands a very high degree of configurability, which is complex and expensive to deliver.
This brings us to competition. Competition in the platform space is fierce, with numerous providers competing for advisers’ business. Competition is good; it drives innovation and helps clients get a good deal. However, as with all competitive scenarios, there are winners and losers. There are also gamblers. Based on aggressive growth targets, some providers may be tempted to price unsustainably in the short term to build scale for the long term. This may seem appealing but is very risky. It will be difficult to increase revenues in the future and the scale is not guaranteed. Failure to secure the required growth merely accelerates failure.
Market evidence suggests this sort of gamble will fail. While advisers are often perceived to be ruthless about price, with ‘fees levied’ typically the top selection criteria cited in industry surveys, the evidence of where advisers actually place business shows that low fees alone will not make a platform successful.