How advisers are using platforms

In the early days, the then so-called Fund Supermarkets such as Fidelity FundsNetwork, offered advisers a one-stop-shop for open-ended fund choice.

Today, there is a vast spectrum of platforms, ranging from wrap-type platforms, former 'supermarkets', vertically integrated distributors and small, bespoke offerings.

And they are proving popular, among both advisers and investors. Data from the Investment Association (IA) for February 2017 shows 46.9 per cent of all gross retail fund sales for the month were carried out on platforms.

Sales from intermediaries outside of platforms stood at 23.9 per cent of total gross retail fund sales.

Advisers either adopting an in-house MPS or using a managed portfolio proposition are typically managing client assets on platforms. Douglas Spence

The IA figures do not reveal which platforms have been popular with intermediaries and investors, but the latest data from platform analyst Fundscape offers more detail.

Table 1: AUM under management. Source: Fundscape

In terms of actual assets under management, the giant at the end of 2016 was, unsurprisingly, Cofunds – which has recently been sold to Aegon by Legal & General, with assets of £83.7bn under management (AUM).

Compare this with the figures from just over a decade ago. For example, in November 2004, I reported for sister paper Investment Adviser that Cofunds would have to grow from £6bn to £9bn just to break even.

Table 2: Asset growth in 2016. Source: Fundscape

But the do-it-yourself Vantage platform of Hargreaves Lansdown is growing at a faster rate than the traditional life offices and adviser-facing platforms, according to the Fundscape data.

At the end of 2016, Hargreaves Lansdown recorded a 19 per cent asset growth (equating to £11.2bn). Cofunds did not even make it into the top five, perhaps because of the sale to Aegon.

What has been boosting platform growth?

Pension freedoms has been responsible for a lot of the growth, according to Bella Caridade-Ferreira, chief executive of Fundscape, as high levels of defined benefit (DB) transfer activity over the past two years has affected flows onto platforms.

According to Fundscape figures, self-invested personal pension assets (Sipps) – which comprise 30 per cent of total assets on platforms – saw 61.9 per cent of net sales in 2016 as advisers moved money from DB pensions and into Sipps.

This was largely as a result of high transfer values on DB pension pots, thanks to low interest rates, combined with the freedom to access pension money at 55.

Ms Caridade-Ferreira says: “The marked rise in transfer values is creating a long pipeline of business that will cushion the platform industry for the foreseeable future.”

DFMs

Another growth area for platforms is in managed portfolio services (MPS), where a trend to outsourcing investment decisions to discretionary fund managers (DFMs) has seen more money move on-platform where such funds are available to advisers and their clients.

Clive Waller, managing director of CWC Research, comments: “The DFM MPS sector is very active, but volumes so far are small.

“The total is less than 5 per cent of total assets under management, perhaps as low as 2 per cent.”

He said some advisers have been using bespoke DFMs “to some degree”. CWC Research and consultancy the Lang Cat are doing more research into DFM strategies.

Earlier this year, FTAdviser reported that advisers may be segmenting their clients into those who are fit for larger platforms, and those who require more bespoke investment services, perhaps on smaller platforms.

Lee Robertson, chief executive of Investment Quorum, says most advisers tend to have a primary, larger platform, which they use for “efficiencies and consistency with their clients”.

He adds: “There are not so many smaller platforms and those firms using them tend to be very loyal to them.

“In terms of DFMs, these are still used extensively for high net worths, but there seems to be a growing trend among adviser firms to seek investment permissions.”

This means the adviser would effectively run managed portfolio services themselves for high net worth clients, rather than outsourcing to a provider on-platform.

Mr Robertson states: “We did this 10 years ago, and I know of many firms who have started the process to do so.”

Douglas Spence, senior investment director for Investec Wealth & Investment, suggests: “Those advisers either adopting an in-house MPS or using a managed portfolio proposition are typically managing client assets on platforms.

“On the other hand, those advisers managing clients with sizeable funds and adopting a DFM strategy are seeing greater value, and a significant reduction in costs by either placing the funds directly with the DFM or wrapping funds in a standalone product.”

Client wealth - does it matter?

According to Eric Welsby, head of partner management, EMEA, for Bravura Solutions, it is not so much the net worth of clients that is driving how advisers use platforms, but the complexity of various client needs.

Mr Welsby clarifies: “The needs of the client base is what will drive platform selection and use.

“Advisers’ propositions are more sophisticated than [a binary approach of having generic] advisory services for smaller clients and using DFMs for larger clients.

“If anything, the commercial pressures would probably necessitate the opposite approach.”

He explains that providing investment advice on an advisory model would require a “significant” amount of research and due diligence, as well as an “intensive administration burden of communicating and getting client permission, in a timely fashion”, to execute the trades to optimise the client’s asset allocation.

Therefore, Mr Welsby believes: “It would be better off for advisers with a small book of high net worth clients to put these on a platform and use a third-party DFM for the larger number of less wealthy clients, where client consent to trade and rebalance within the parameters of the mandate is not required.”

Additionally, Mark Polson, founder of consultancy the Lang Cat, says it is not clear whether smaller platforms or DFM strategies on-platform are necessarily more nimble and more suited to higher net-worth clients.

He explains: “Platforms, large and small, have been so busy with regulatory change we do not see a massive difference.

“We do see advisers making more calls in terms of which platforms fit with a particular business model.”

In the latter case, Mr Polson says advisers are showing “a willingness to reconsider existing patterns of support for platforms which can really deliver efficiencies into the adviser’s practice.”

Advisers' use of platform technology

But this is not about whether the platform is smaller and more bespoke, or whether the platform is large and all encompassing: for Mr Polson, the choice is about efficiency and technology, not size or structure.

He adds: “This stems from a deep-seated dissatisfaction with how platforms work or do not work for clients and for the back office.”

Emma Napier, head of distribution at True Potential, agrees technology is a core reason for advisers choosing one platform over another.

She comments: “We are seeing more of our own community of advisers engaging more in technology with clients and therefore use True Potential’s systems better.

“We have not seen advisers segmenting clients across the platform market. Instead, we have seen more engagement in the concept of technology supporting the adviser journey all in one place.

“Some advisers tell us they are nervous about the changes in the platform market, as well as the uncertainty that unprofitable platforms bring.”

Future of advised platform market

Will platforms have a future? If so, will it be the more bespoke ones or the larger ones that survive?

Ms Napier believes there will be business as usual for many firms: “for general daily business, the majority of advisers will still use the same platforms as they have done historically.

“As long as things go smoothly, with no major issues, these trends will stick.”

According to Mark Till, chief distribution and marketing officer for Aegon: “The advised platform is in rude health, with commentators predicting assets on retail platforms will continue to soar to £600bn by next year.”

When it comes to key components that advisers and their clients will look for in terms of added value, Mr Till believes “functionality and keeping pace with technology” will be crucial for future growth in platforms.

Moreover, he believes larger platforms will be in a position of strength in the months and years to come, especially when it comes to dealing with rule changes.

He adds: “Regulatory and legislative change comes at a cost, so it is not surprising that scale will enable success by allowing platforms to meet those demands, while investing in future technology and prioritising service and user experience.”

We have seen more engagement in the concept of technology supporting the adviser journey all in one place. Emma Napier

Bravura Solutions’ Mr Welsby thinks there is room for both smaller and larger platforms in the future. “Advisers will continue to select the platform(s) which are right for their clients and best meet the needs of their business.

“What will attract advisers to different platforms will depend on their propositions and unique selling points.”

Among these selling points, he lists:

• Breadth and depth of asset types.
• Model portfolio capabilities.
• High quality data reporting for adviser firms with in-house technology capability.

Cost will also be a factor in platform choice, says Mr Spence. “Financial services will continue to evolve, for example, changes to pension legislation and flexibility, and the implications of Mifid II.

“Costs are increasingly under the spotlight from adviser charges, fund management fees and the costs of holding funds on a platform.

“Clients are spending more time scrutinising the costs inherent to the management of their portfolios.”

He says the latest wave of consolidation in the platform market – as evidenced by the sale of Cofunds to Aegon – means advisers should reassess which providers are financially resourced, and which have the system capability to adapt their propositions.

Mr Spence adds: “It is highly feasible the consolidation of platform providers continues as the increasing costs of legislation, regulation and system improvements are felt, as well as the pressures from consumers for lower costs and greater value in a low-return environment.”

Three models

For Kevin Russell, proposition director for SEI Wealth Platform, there may be three trends that develop around how advisers use platforms.

He suggests that advisers with propositions targeting the entire market in the UK will “typically” spread their clients around several platforms to take account of the “broad range of needs”, echoing the point made by Mr Welsby.

Mr Russell explains: “We will continue to see some advisers using more than one platform. However, the main trend in place is at a business level within advisory firms, which is shaping their platform needs.”

Mr Spence agrees, and notes that cost will also need to be factored into this. “The challenge for the platform market is how to continually justify to the end client there is a real, tangible value in charging a percentage-based fee relative to the funds held on the platform, instead of reverting to a fixed fee cost.”

The second trend Mr Russell notes is how networks shape the way in which their members use platforms. “IFAs with lower assets under management tend to join networks which make decisions around the technology, platforms and investment propositions to which the advisers have access,” he comments.

His last point is that there is a “third route” for larger firms, which involves “taking back rather than absolving control”. By this he means forms can “continue to accept the solutions available to them, such as the investment proposition or the underlying platform”, or engage with businesses that can help them build the investment proposition into their advisory model.

The latter point is known as ‘vertical integration’. This has become a buzzword in recent years but it is clear to see a trend towards more vertically integrated models of platform use among advisers.

Mr Waller comments: “There is a huge, strategic move to vertical integration.” One element of vertical integration is a financial services provider buying or creating adviser distribution or platform capability.

He says: “This includes the likes of Fusion Wealth/Best Practice, Succession/IFDL and Old Mutual – who have bought massive distribution. Standard Life is also a huge player here.

“The other variation on vertical integration is where firms such as SEI, Pershing and Winterflood are powering different types of proposition, from Tilney Bestinvest [which uses SEI], through to robos such as Wealthify and Fundment.

“All this drives the major drift to restricted, vertically integrated propositions,” Mr Waller added.

Whether this becomes an even bigger part of the advised platforms market is unclear; what is clear is that platforms need to evolve along with the changing needs of the users – both advisers and clients.

According to Mr Till: “It is important to engage with users and capture their feedback.

“Our advisory board and adviser panel has been launched to do just that: listen to those using the platform daily, so we can adapt our service to reflect their needs.”

simoney.kyriakou@ft.com