They say the way you can tell if a politician is lying is to check if their lips are moving: if they are, then they are lying. That’s probably true, and it also holds water in our industry.
I’ve been thinking about that quote recently, as so many of the large companies that advisers and clients have to deal with on a regular basis appear to have joined a weird ‘death cult’, which involves setting your own hair on fire and then running around the executive car park complaining your head is hot.
In particular, my feline spider-sense (this is totally a real thing) has been twanging as provider after provider tries to outdo its rivals when it comes to vows of solidarity with advisers and how central they are to the provider’s business.
A sister fib to this one is the classic that the provider sees itself very much as a supplier; just part of the supply chain to the adviser, because it’s the adviser who’s at the centre of the universe, and so on. This is a particularly good fib because it takes more energy to disprove than most people can be bothered to expend.
But what happens when advisers really do reinvent themselves as the centre of the universe? What happens when they become the manufacturer of the proposition the client receives? What happens to typical, off-the-shelf platforms or pensions, or products, when the adviser can make these themself?
The answer is profound: a potential rewiring of the way the retail long-term savings and investment sector works. One which connects the adviser firm and the componentry that goes into ensuring clients get where they’re going, and disintermediates the ride-along Charlies who are currently camped out on the client’s portfolio.
New developments
In the news recently we’ve seen some interesting shifts from AFH and Foster Denovo in this direction. Both are consolidators in one form or another, and both are building up some pretty chunky scale: AFH, a relative latecomer to the space, has north of £3bn in assets under administration (AUA).
Both firms are absorbing the platform charge – or planning to – inside their own adviser charge, and both are running a white-label platform arrangement. This simply means that each firm has licensed platform technology itself – in roughly the same sort of way that a Nucleus or a Novia might do – but instead of offering that platform to lots of firms, it just keeps it for itself.
AFH and Foster Denovo have rightly seized the headlines with this move. But there’s understandable confusion. Clients won’t pay an explicit platform charge, that’s true. But there is still cost associated with custody, dealing, tax wrapper provision and administration, and clients still pay that. It is a sort of bundled charging structure, except one that could only have been born post-RDR.
I’d encourage all firms in this position to give clients a breakdown of the adviser charge – “approximately 0.x per cent of your charges goes to investment administration including custody and safeguarding”, or something similar.
Larger firms are increasingly able to create their ‘own’ platform rather than simply white-labelling a retail offering, and this gives them the ability to control charging structures, among other things.
I don’t think this is a problem. Advisers should be absolutely at the centre of what’s offered to the client, but individual advisers in those firms must still be free to recommend what’s most suitable for their client, irrespective of whether it’s the bundled, in-house option or not. Whether this is better for clients depends on the total cost of ownership, and how suitable the platform itself is.
The form of charges is interesting, but we can’t make a case conclusively one way or the other until it’s demonstrably true that investing via one of these offerings is significantly less expensive on a like-for-like basis than through an adviser using a retail platform. I think the potential for that is there, but we’ll have to see whether firms really do pass on lower costs, or whether they use economies of scale in the platform side to fatten their own margins.
DIY pioneers
Even this model isn’t all that disruptive: it’s just one link taken out of the chain. More interesting still are those few firms that have gone the whole hog and built their own systems from the ground up. For my money there are two leaders in this space, one of which is well-known and another that is a bit of a well-kept secret.
Benchmark Capital, the tech firm behind the Best Practice network, is the well-known one. Ian Cooke, the Tazmanian devil-like force of nature behind that business, famously couldn’t find a platform or a back-office system he liked, so he built one of each and linked them together. The results are Fusion Wealth and Enable, which have ended up being genuinely credible in their own right. Incredibly, the two-way real-time integration between them remains unrivalled, even by back-office firms like Intelliflo, which pride themselves on their integrative approach.
Fusion currently has around £5bn AUA, and with the backing of a recent investment from Schroders it looks well set for the future.
The secret lot is a Scottish adviser firm called Save and Invest (S&I). Its proprietary system was built by one of the guys behind Touchstone and integrates customer relationship management, workflow, product administration and investment allocation all in the same piece of kit.
S&I advisers work within recommendation parameters built into the system, which are designed to give suitable outcomes without being completely ‘cookie-cutter’. Compliance checks and referrals are built into each case, and the whole business effectively hangs off the one piece of software, which means everyone from advisers to administrators become adept at using it over time, driving efficiency and all that good stuff.
Investment trading and so on is supplied by AJ Bell Youinvest – the direct-to-customer part – behind the scenes. It’s unconventional in a number of ways, but has been operational for the past six years and seems to work very well. Roughly £1bn sits on the system.
Common strengths
All the firms I’ve mentioned share a few attributes. The first is scale – getting out of the normal retail shop still requires a decent amount of AUA, although this has fallen considerably over time. Second, the firm has to be happy to put some resource behind it. Greater control and potentially greater revenue is possible – but you have to want it.
You’ll need to spend money on development. You’ll need some new people – generally in development, IT management, risk management and middle office, and these folk aren’t always cheap. You also need to have a mindset that is about really driving AUA and growth in future.
In many ways, firms in this position are starting to behave like private client stockbrokers and wealth managers, who have been stitching together tech propositions in terms of front ends, administration and trading for ages – albeit often in a pretty haphazard and sclerotic sort of way. The point of the whole thing is ownership, making sure that each touchpoint with the client is exactly the way you want it.
The more you invest in making sure everything is set exactly to your own specifications, the closer you come to the 200lb gorilla of this space. This is a firm that gets control of the client proposition and maximisation of revenue absolutely right, and which now has nearly £100bn of client assets and a place in the FTSE 100. I’m talking, of course, about St James’s Place.
Would providers cope in an industry where genuine control from advisers meant that they couldn’t really access most flows any more, because firms or groups of companies had just gone ahead and made their own? I’m not so sure they would.
So it’s all there if you want it; you just have to want it. And if anyone tells you it’s a waste of time, or it’s not doable, or whatever, just remember another good quote, this time from that old banterer Upton Sinclair: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
Mark Polson is principal of the Lang Cat
