PlatformAug 2 2018

What are the reasons for consolidation?

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What are the reasons for consolidation?

In particular you will hear this refrain from those who remember working as an adviser 10 years ago when there was a mere handful of ‘wraps’ or ‘fund supermarkets’, as they were called then, to choose from.

Over the last decade the platform market has grown and evolved and there are now over 20 platforms UK intermediaries can use to manage their clients' assets.

A natural progression for an overcrowded market is for consolidation to take place, where good fits are found between once rival businesses and a takeover is achieved.

This is by no means unique to platforms, it is a cycle which can be seen all industries.

Market shift

For such a so-called crowded platform market however, the rate of consolidation to date has been slow.

That said, there have been some significant mergers over the years including:

  • Skandia and Selestia
  • Standard Life and AXA Elevate
  • Aegon and Cofunds

Examples of consolidation between smaller platforms include:

  • Embark and Avalon
  • Interactive Investor and TD Direct

In its Investment Platforms Market Study interim report, the Financial Conduct Authority (FCA) highlights the make-up of the platform market has been shifting significantly despite the lack of headline grabbing deals going on. 

In an annex to the report the FCA shows how the market share has become more diffused over the past few years. 

The four largest platforms held 60 per cent of the market share between them in 2013. In 2017 they held 46 per cent. 

Figure 1: Percentage of the market share held by the four largest adviser platforms

Source: FCA Investment Platforms Market Study interim report. C4 is defined as the sum of the market shares of the four largest platforms.

Another important development is how the pool of technology providers behind platforms has been shrinking.

In the UK advised market there are only three main technology providers: FNZ, GBST and Bravura. There are still a few platforms which work on their own proprietary technology such as Transact, Parmenion and James Hay but generally the trend has been a move away from companies building their own software.

In 2017 consultancy Lang Cat predicted proprietary technology would decrease from being used by 41 per cent of the market to 15 per cent by 2020.

The technology behind platforms is worth noting when looking at the topic of platform consolidation because, in theory at least, it makes for an easier merger if two companies are already using systems from the same provider. 

Slow and steady

Independent platform consultant, Stan Kirk, says from what he has seen among the consolidation deals, it has generally been opportunistic on the part of the buyers when they see an opportunity to increase their assets under administration.

He explains: "Most so called 'consolidations' in the platform world have consisted of opportunistic moves at a cheap price to hoover up some more funds under direction from platform owners who have become disenchanted with their platform business experiment (much money spent, little return).”

Mr Kirk predicts as long as there are platforms struggling to make profit, we will see more consolidation: “The process probably hasn't finished given the number of unprofitable or very low profit operations still around.

"The direct to consumer market will not be immune to this."

According to Mike Barrett, consulting director at Lang Cat consultancy, there are good reasons why it has been slow going with consolidation.

“The FCA report said platforms are not delivering high levels of sustained profits," he points out. 

"From a financial perspective it is not always preferable to merge a platform, and that is before you consider the technology issues around that, and the fact it will be a lengthy process and you will have to be very committed, on costs and management delivery.”

Mr Barrett previously worked at Old Mutual and reflects on the challenges of the Skandia merger: “The merger was between what was the Skandia wrap and the Selestia platform.

"It was a natural fit because there was not a big overlap in terms of functionality. Skandia was strong in online portfolio management tools and post-sale reporting and the Selestia system was much stronger for new business and straight through processing.

“Unfortunately, the migration phase of that programme, migrating old Skandia clients onto that tech, took longer than expected and costs escalated."

He continues: “Bringing two systems together is bringing together two companies. There are going to be job losses and that will be tough for a business.

"The business loses its focuses, and the working atmosphere is not as good as it could be for a good 18 months afterwards.

"The bit you remember most is the people, the culture and relationships you have with new and old colleagues, with people coming and going.”

Indre Butkeviciute is founder and wealth coach at London-based Lily Advisory.

She is pragmatic about consolidation, saying it can make life easier for clients and advisers. 

“Does it really make a difference going to one platform over the other one when they do similar things? Not really. It might actually be easier if they are all in one.”

She says she sees “old school” life company platforms struggling to meet the needs of today’s younger clients and said consolidation might be a way for them to get the more efficient functionality required. 

Jane Hodges, director at Money Honey Financial Planning, is all about efficiency with her firm offering a paperless, remote service for clients.

Ms Hodges pointed out it is very hard to gauge if consolidations have been effective for improving platform functionality and service.

She notes: “If there is a need for mergers for additional investment for scalability, updated technology and financial stability then they can be very positive but it is hard to know if, to date, the investment in platforms that comes with consolidation has brought these outcomes.”

Christine Dawson is a freelance journalist