Market correction ‘will hit platform revenues’ this year

Consultancies Altus and the Lang Cat, as well as commentators at Share Capital, said it was important to understand the impact of market conditions on adviser platforms, as share prices in advised and direct-to-consumer platforms have dipped considerably over the past six months. 

IntegraFin, Transact’s parent company, is down 60 per cent, AJ Bell and Abrdn are both down 30 per cent, and Hargreaves Lansdown is down more than 40 per cent.

Under a basis point model on assets, the global decline in markets will hit platform revenues.Jonathan Warren, Altus

Assets have also taken a hit this year. In the first three months, a declining market shaved off £15.6bn from advised platform’s coffers.

In April, Transact went as far as to warn of a revenue hit caused by the £1bn dip in assets it experienced during this period.

But experts have said it will not be the only platform whose revenue falls victim to such market conditions.

“The FTSE 250 has fallen 17.5 per cent. Markets globally are going through a correction as inflation, interest rate rises, the war in Ukraine and the aftermath of the pandemic hits investor confidence,” innovation head at consultancy Altus, Jonathan Warren, told FTAdviser.

“Platforms, like technology stocks, benefited from a boom in investor numbers and trading activity in the pandemic. As we emerge, results and numbers look low compared to the artificial numbers recorded the year before.

“Under a basis-point model on assets, the global decline in markets will hit platform revenues in 2022.”

Warren added, however, that advisers should not worry about the dips their platforms are currently experiencing. 

“Should advisers be concerned? No. It looks like market conditions, combined with a general view of the platform market due to revision in investor behaviour and margin pressure.”

Zero interest rates are no more

A number of advised platforms in the UK are private equity owned, meaning they are vulnerable to what is now a rising interest rate environment.

This is because private equity firms usually buy assets using debt. The era of low interest rates made it extremely cheap to do this, but as that comes to an end, so their repayment costs will rise, just as revenues may be declining as a result of falling stock markets.

The latter is because most platform charges are calculated as a percentage of the assets a client has on a platform. Stock market declines push down the value of a clients assets, and so reduces the revenue a platform can make per client. 

Private equity backed platforms include Nucleus, Novia, True Potential and Parmenion.

But public equity funded firms such as Transact, which may not have the same debt levels, could also be vulnerable in this environment. Because if savings interest rates go up, shares are a less attractive investment. And if mortgage rates rise, people have less money to invest on platforms.

Shore Capital equity research analyst, Ben Williams, said: “It [Transact] was priced to absolute perfection. Businesses like that were massively ‘in vogue’. And funds investing in companies like that - i.e. steady, stable growth - were also the funds getting all the inflows,” he explained.

“At one point, IntegraFin’s stock was trading at 40 times core earnings...But market declines and rates going up are enough to take a quarter off a share price alone for businesses which are equity, and not debt, funded.”

Williams said Transact's share price decline was categorically not a result of a change in long-term organic growth predictions. “You can’t say there’s been a substantial slow down in net flows, as the quarters are comparing,” he said.

One of the factors affecting the share price is that we announced an increase in future expenses over the next 18 months due to further recruitment.Jonathan Gunby, Transact

David Ferguson, founder of Nucleus and now chief executive of Seccl, also highlighted the risks rising rates pose to platforms last month. He said higher interest rates, as well as a pressure for lower fees, will place a squeeze on private equity-backed platforms in particular.

Responding to a request for comment, Transact’s boss Jonathan Gunby told FTAdviser that while its parent company IntegraFin has seen a fall in its share price, this has “no impact" upon Transact's strategy. 

“We remain UK only - adviser only," said Gunby. "Indeed, one of the factors affecting the share price is that we announced an increase in future expenses over the next 18 months due to further recruitment. 

"This recruitment enables us to continually improve the platform and service we provide." 

Dip in service levels ‘real red flag’

Industry consensus reckons advisers have nothing to worry about until platforms’ service levels begin to dip.

Consulting director at the Lang Cat, Mike Barrett, said: “The real red flag in our world would be a deterioration in adviser sentiment.”

While a share price might seem alarming, it’s whether we see a service dip.Mike Barrett, the Lang Cat

Taking the Transact example, according to the Lang Cat the platform has consistently ranked one of the top businesses in terms of service ratings and gross flows.

“Share price and adviser sentiment are separate,” he said. “While a share price might seem alarming, it’s whether we see a service dip.”

A number of platforms, including Transact, struggled during Covid-19 due to the shift in home working which put pressure on service levels for a time.

“That challenge wasn’t Transact specific,” said Barrett. Despite the temporary struggle, sentiment among advisers does not seem to have been dented in the long-term. 

In the first quarter of this year, the Lang Cat platform ratings scored Transact a 4.21, putting it number 6 for overall adviser satisfaction. 

Transact user Warren Shute, a financial planner at Lexington Wealth Management, said Transact has historically been "generously valued at 40+ times earning", and that now it's "more fair" and, with current market conditions, "a good investment".

"Many companies struggled with staffing over lockdown period and they were open and honest about that, they have healthy growing profits, a very strong balance sheet with high cash levels and its own software, which still works excellently," said Shute.

"The share price hasn’t affected any of the company fundamentals so we’re not concerned."

Skerritts Wealth Management's chief executive, Richard Skerritt, also uses Transact. He said: “We personally haven't seen a drop in service levels recently.”

However, the firm is looking to cheaper platform alternatives for new business, pointing to the squeeze on margins Ferguson referenced last month.

ruby.hinchliffe@ft.com