We had loads of interesting things happen during what is traditionally a quiet time; no space to cover them all here, but I do want to pick on one and take it out for a little bit of a walk.
FNZ’s intended purchase of GBST is a big deal for the UK platform market; which is to say the UK retail investment market, and it’s worth spending some time on that.
As you probably know, the UK advised platform market is dominated by three big underlying software companies: in alphabetical order, Bravura Solutions, FNZ and GBST. Added to this we have a few firms who use their own kit.
When we widen out the group to include companies such as St James’s Place, Towry and direct platforms, we can add JHC Figaro, SEI Investments and DST Bluedoor. There are also some new entrants that I’ve mentioned before in this column, including Seccl (itself just acquired by Octopus, pending regulatory permission) and Hubwise.
Advised assessment
Let’s stick to the advised sector for the moment, and I’ll bring the others in shortly. The current landscape is summarised in Chart 1, which shows the biggest chunk by quite some margin goes to ‘proprietary/other’. That’s because Quilter currently uses its own kit, though it will eventually transition to FNZ once its MOAR (mother of all replatformings) project is finished. Other inhabitants of that segment of pie include James Hay, Seven IM (which uses Pershing), Transact and Parmenion.
The rest of the market – roughly two thirds – uses one of the outsourcers. As you can see, GBST and FNZ have a roughly even split. Each has one real powerhouse of assets under administration in its corner: FNZ has Standard Life Wrap/Elevate, and GBST has Aegon, which by extension gives it the ex-Cofunds retail book of £45bn or so.
Bravura isn’t short of clients either – its powerhouse is FundsNetwork and it also has Ascentric and Nucleus in its corner.
All three also enjoy clients in other areas of the market: Bravura has the Pru, GBST has Canada Life and Vitality, and FNZ has Barclays, Santander and others.
We’ve just about reached the end of the big replatforming wave, which is now replaced by corporate activity, all of which advisers are expected to surf with equanimity. However, as mentioned above, Quilter still has the MOAR to complete. With its considerable AUA moving from the proprietary to the FNZ column, that will reduce that segment from about 36 per cent of sector AUA down to 23 per cent.
If we spool forward, let MOAR complete and assume that the GBST/FNZ deal goes ahead, Chart 2 shows how the market will look at that point. Suddenly the combined FNZ/GBST beast has more than 60 per cent of the advised platform market.
How you feel about this will depend on how important you think underlying technology is. From my point of view, I think it’s unlikely that we’ll immediately see the end of all instances of GBST’s Composer system, for example.
Clients have to be ready to move, and we’ve seen what happens when you rush it. So although it’s undeniable that the concentration in the market in the biggest outsourcer is increasing dramatically, the actual underlying systems will be a bit more diverse.
Direct deals
FNZ has also bought JHC, the software behind Figaro, which is a really popular system for stockbrokers, including lots of direct-to-consumer platforms such as AJ Bell Youinvest and Charles Stanley Direct. We’re used to tech firms like Apple and Google buying loads of other technologies; we just haven’t seen it so much in the retail investment space. But FNZ is flush with private equity, and I wouldn’t be at all surprised to see more acquisitions over the next few years.
Nonetheless, by the time we bring in the AUA from other channels it’s starting to get to the point where these businesses have more control over end-customer investments than any platform operator that you might favour with new business flow.
This inevitably brings in the question as to whether these providers should be regulated or not. My thinking is that they should. In fact, FNZ is partly regulated already for some of its activities. The other providers have also indicated their willingness in the past.
The thing with regulation – well, be careful what you wish for. It doesn’t come for free, and alongside oversight and potential additional investor protection will come further cost, which needs to come from somewhere, and I think we both know where that will be.
Reliance
It’s also far from the case that each provider uses its outsource partner in the same way. This is particularly true of non-FNZ tenants. For example, Novia uses a great deal of what GBST has to offer through Composer, but creates some of its own technology on the side. Aegon similarly consumes lots of what GBST does.
But AJ Bell Investcentre, also a GBST client, uses only a little of what the software provider can do, having undergone a multi-year project to build its own kit around the GBST core. Arguably, then, this might mean that AJ Bell is much less dependent on its outsource partner than Nucleus is on Bravura, for example.
It’s easy to imagine that this might be something the stock market likes and which might be rewarded in the share price. Nucleus is now also building out more and more of its own elements around the Bravura core.
There are other interesting implications here. Many companies, when operating a primary/secondary platform strategy, mention diversification of provider as a form of risk control. But if the underlying technology is shared, that risk control might not be as strong as imagined. And a firm that has picked, say, Standard Life Wrap and Novia, may find in a few years that both are more common under the hood than not. It’s a bit like banks merging – you thought you’d spread your money around to maximise protection, but it turns out it’s all in Lloyds Banking Group after all.
Advisers looking for different models may want to look at Transact, which does its own thing, Parmenion, Fusion Wealth (with SEI in the background), Multrees, True Potential, Seven IM (Pershing), James Hay, Hubwise or Seccl/Octopus. Models vary quite dramatically between these platforms – we’ve talked about that before in this column – but there is plenty of choice.
One wrinkle in this landscape to consider is that we are already seeing a sort of sub-tenant market starting to develop. This is what SEI has done for a long time with Fusion, True Potential and others – though True Potential is now exiting its SEI relationship. In this model, you sign up with the tech provider, and then get other advisers to sign on with you – normally through a consolidator or network model. That’s exactly what Seccl/Octopus and Hubwise are doing with their own technologies – and it’s what Embark is doing with FNZ, too.
What does it all mean? You form your own views. For sure there is consolidation and some attaching risk, but when you take a wider view of the market I think there’s still plenty of choice for those who want to take it.
Mark Polson is principal at the Lang Cat
