There is a widely held belief that crocodiles have barely evolved in millions of years.
Perfectly adapted to their environment, they are anatomically similar to their Jurassic ancestors and have branched out into very few species, while other animals have diversified into many thousands of species.
Of course, this is a misconception as nothing stops evolving, but the rate at which it does is highly dependent on changes in the environment that forces the species to evolve. Crocodiles have been fortunate that their environment has remained largely unchanged.
In a briefer period, a lot of analogies can be drawn between the fortune of the crocodile and platforms. After the financial crisis in 2008, investment platforms have operated in a relatively stable and preferential environment.
Low interest rates forced people to invest rather than save, and the investment platforms offered a convenient conduit to do so. The markets also went on a long bull run, fuelled by the low cost of money, offering platforms compounding revenue growth.
In the same period, the platform offering matured and market dynamics drove it largely toward a commodity, outside of those with certain specialisms or reputations for service excellence.
The environment has changed, so platforms cannot stand in crocodile shoes. They need to evolve and adapt. The question is whether they can.But, unlike the lucky crocodile, their environment has changed. Global turmoil, high inflation and a cost of living crisis later, the platform market recorded its worst net sales on record in Q3 2023, according to Fundscape data.
The platform business model is predicated on asset growth, which becomes exponentially more challenging in a perfect storm of market volatility and reducing net flows, as consumer behaviour changes under different economic conditions, exposing our preference for safe harbour assets and risk-free return, while we cope with a reduction in disposable income to direct to long-term investments.
The environment has changed, so platforms cannot stand in crocodile shoes. They need to evolve and adapt. The question is whether they can.
Propositionally (anatomically), it is difficult to see how the platform offering changes shape, which places an emphasis on becoming leaner, faster.
Altus’s research on platform profitability showed how the cost of running a platform has gradually declined from over 50bps in 2011 to 18.5bps in 2021.
In a market where asset growth and revenue are slowing outside of a platform’s control, the only ticket to survival is reducing costs even further. As climbing interest rates refuel the cash margin debate, platforms reliant on cash margin for profit may find another ‘asteroid’ heading their way, as last month’s Financial Conduct Authority 'Dear CEO' letter shows.
Of course, the commoditisation in the market is in part driven by so much of the total assets now being run on common technology, or by outsourced administration services. This limits the ability to adapt, as many platforms now only control a subset of the capabilities that make up the complete platform offering.
The commercial necessity to adapt is rarely acknowledged in the good times, but environmental change has been thrust upon the platform species.
The need to adapt to the changing environment is unlikely to be brand new information to those steeped in the platform market who equally know that change is hard, particularly when the conversation turns to re-platforming and technology upgrades.
The crocodile has acute senses, able to detect the slightest disturbance or vibration and possesses excellent hearing, a sense that platforms may need to evolve to survive.
The demand for better service and the integration of core systems continues from advisers, and while integrations come with many complexities, platforms may need to attune their hearing to the demands of the market and deliver.
Of course, what you hear and what you can do about it are not always aligned, as the crocodile that ended up as handbag will posthumously testify to.
These demands are directed at a commoditised, low margin market that finds itself under further pressures to reduce cost rather than invest and innovate, and which is already beset by mandatory change.
In the fight for increasingly scarce resources (asset growth), the largest and strongest may win out.What we have seen is some of these demands being met by new species of platform with integration and higher levels of automation built on top of more modern technology that also permits greater propositional flexibility. Can the new breed become the dominant species due to its advantages in its environment?
Darwinism can be misconstrued as suggesting the ‘strongest’ survive, rather than the most adaptable. The original platforms cannot stand in crocodile shoes, but financial services is not nature, and it is remiss to suggest that size and scale do not count in our industry, particularly in revenue and cash flow.
The platforms that survive will be those with large moats, principally through strong intermediary relationships, trust and service delivery. They, along with others, will need to continue reducing their cost base, targeting around 10bps, while finding the scope to deliver the new capabilities the environment demands to survive.
I predict we will see consolidation as the platform’s natural habitat goes into decline. In the fight for increasingly scarce resources (asset growth), the largest and strongest may win out.
If an established name was to fail, the challenge will be who would be prepared to not only take on the book and a complex migration, but the responsibility for the outcomes under consumer duty.
Jonathan Warren is head of innovation at Altus Consulting
