Man, I hate being proved right. In last month’s column I suggested we’d see more exciting stuff in the world of platforms and adviser technology this year than we’ve seen in the past three. It’s only February, and already we’re not short of things to talk about. I’m going to pick three of the ones that have piqued my interest in the past few weeks.
First of all, Transact has fulfilled its promise and kicked off its initial public offering (IPO). This is, as far as I know, the only IPO in the platform operator space – the only other similar company that springs to mind is Bravura Solutions, which provides the underlying tech to a range of platforms including Nucleus and Ascentric, and which listed on the Australian Stock Exchange in 2016.
That’s big news in itself, but bigger still is the valuation the selling broker, Peel Hunt, has put on the business – a forward price-to-earnings ratio of between 19 and 21 times. This gives a valuation not unadjacent to £700m or so for the UK’s first proper wrap platform. Not bad for government work.
Obviously, we don’t know how the listing will pan out, but this is the first time we’ve seen a proper, market-driven exercise in the platform space rather than a trade sale. By way of comparison, Cofunds sold for £140m and the promise of new carpets in Witham, and Elevate is popularly believed to have changed hands for £40m and a pound of grapes.
The IPO has now officially priced Transact parent Integrafin at £650m, which means we’re likely to see a sprint to market from a few others. AJ Bell has been mentioned in dispatches already, and the rumour mill is rife with gossip about whether the time is right for Nucleus to go for a change of ownership.
Further down the value chain, the only major outsourced platform tech provider that isn’t listed is FNZ – which supplies tech to Standard Life, Zurich, Santander, Vanguard, Aviva, Barclays, among others – and it wouldn’t be a huge surprise to see that business test the water as well.
In less good news...
If there’s one thing that gets the platform space buzzing more than potential corporate activity, it’s when something hits the skids. There are a couple of examples of that in the form of Barclays Smart Investor on the direct-to-customer side, and Aviva’s new advised platform on the, er, advised platform side.
Both these businesses have been riding the replatforming rails for some time, and both happen to be powered by FNZ. But before anyone gets excited, problematic implementations happen and we’re not pattern-spotting here.
The Barclays issue has been well explored, but continues to cause major grief for many clients who don’t have advisers to fight their corner for them. Many clients have been unable to log in, let alone trade, for some time now (I know, because I’m one of them).
Trust is hard won and easily lost in the direct investing sector, and we hear of many cases where people are trying to transfer out of Smart Investor (proof if ever there were any that nominative determinism doesn’t work) – into Hargreaves Lansdown, Interactive Investor and AJ Bell Youinvest in particular – with frustrating results.
On the advised side, Aviva isn’t having it easy in its move from Bravura to FNZ. Problems have ranged from functionality being unavailable, to trades not being settled, to – horror of horrors – adviser fees not being paid in a timely manner. And if ever there was anything unforgivable, it’s not getting adviser fees paid on time.
Next steps
So what’s gone wrong? It’s too early to tell for sure, but there is always a huge gulf between testing a system in a ‘safe’ environment, and a full-on live deployment, and I suspect the delta between the two is what we’re seeing here.
We have no shortage of advisers expressing displeasure to us – a function of the remarkable success Aviva has had recently with its platform. Many have asked what we at the Lang Cat think they should do as a result of the issues, and here’s what we think.
Our view is that if an adviser picked Aviva as a destination for their clients’ hard-earned cash, then they must have thought it was suitable. Nothing we see makes it any less suitable than it was. The issues advisers are having with Aviva are real – they’re not imagining them. But they will pass. This has been a tougher implementation than we all thought it would be. No one knows that better than the folk in York, who are mainlining caffeine as we speak to try and sort it all out.
To be critical of Aviva – it should have pushed FNZ harder to ensure error-free ball at the live implementation. But in its defence, it has played everything with a completely straight bat. If you visit the Aviva For Advisers website and look at its replatforming ‘whiteboard’, you’ll see the known issues displayed for all to see.
That takes guts and shows a commendable transparency, which I think should be rewarded with patience from advisers. No one wants to be here, but here we are and it’s about making the best of it.
Generally speaking, I think that if a provider hits major issues, which it demonstrates it understands and is addressing, then an appropriate reaction from advisers is to be cautious with new business flow. It is inappropriate to start transferring clients away. If nothing else, doing so places additional stress on the business and is likely to lead to additional problems.
It’s better to keep a calm head, wait out the issues and see how the land lies once business as usual has resumed.
DFM disruption
So that’s two out of three. My third this month is a really interesting move from discretionary fund management (DFM) stalwart Brewin Dolphin, which has overhauled its managed portfolio service that it offers through lots of platforms.
To cut a long story short, most of these models use standard retail funds in a model structure, which the DFM keeps control of and rebalances periodically .
What Brewin has done is to move to a sub-advised or segregated mandate structure for its portfolios.
In case you’re nodding sagely and thinking ‘what?’, the upshot is that it now uses a combination of four of its own funds to create about 60 per cent of the content of its portfolios. The constituents of those funds are – keep up at the back – the fund managers that used to be in the portfolios anyway. The deal is that by not using the retail fund and by bulking up trades across all the different platforms into these funds, Brewin can achieve a lower cost for investors. The remaining 40 per cent keeps doing what it was doing.
The cost of running the funds isn’t high – 0.05 per cent to the authorised corporate director, Maitland – and Brewin says this is more than compensated for by the reduction in ongoing charges figures it has managed to negotiate. For example, the balanced portfolio moves from 0.62 per cent (ex transaction fees and Brewin’s own 0.3 per cent plus VAT fee) to 0.52 per cent (after Maitland’s costs) in the new structure.
I’ve had a bit of time to get used to this now, and I don’t mind saying that I had an eyebrow raised at first. Basically, what you’re seeing here is the way that insured funds have been run since time immemorial. The provider buys in the funds at an institutional rate, ships it out the door at a retail rate, and pockets the difference, in what I like to call the 30-75-45 model. This stands for ‘buy it in at 30bps, sell it on at 75bps, and have a lunchtime bottle of wine at 45 quid’, in case you were wondering.
But what Brewin is doing here is a little different. It swears blind that it isn’t taking a clip on the funds – that is to say, investors pay what the fund costs the firm and no more than that. Brewin makes its money from its 30bps charge, same as normal – and, for what it’s worth, I think that 30bps is going to be under big pressure soon from AJ Bell and Tatton’s offerings in particular.
The other compromise that these structures bring is transparency. You can examine a model, but you can’t always dig inside a fund made up of sub-advised mandates so easily. To be fair to Brewin, it’s committed to showing the exact make up of the funds and who’s managing what. If it keeps both these promises, then this is potentially quite a good move.
It is arguably the first time, outside of Old Mutual’s WealthSelect, that we’ve seen buying power exercised in the on-platform model portfolio space for the benefit of customers. Brewin can do that because it’s got the thick end of £3bn in its models and so has some muscle to flex.
So there you have it. Tonnes going on, and tonnes I haven’t even mentioned yet. You’ll just have to tune in next month to see what else is happening.
Mark Polson is principal of platform and specialist consultancy the Lang Cat
