Replatforming costs £260 per client

The UK platform industry has been undergoing a huge shift as businesses update their systems to respond to digital developments and changing customer demands.

The consultancy firm estimated that platforms make around £117 profit per year from each client, meaning the £260 cost of replatforming would wipe out two years' profit.

The total cost of replatforming for all 18 advised platforms is expected to amount to £650m, meaning they would have to dish out £4,000 to move every £1m of client money.

Mark Polson, principal at the Lang Cat, said he continued to expect the platform market to fragment and reform, driven largely by advisers.

“As more and more adviser firms realise that they can really start to power through in terms of growth (whether through co-operation, consolidation, acquisition or organically), they’ll be able to remake the platform sector in their own image.”

In the long-term the cost will come home to roost with painful consequences. David Tiller

He also said he thought there would be a resurgence of cash flowing into discretionary fund management businesses, describing the trend of DFMs on platforms as one of the “stranger developments” of the past few years.

Last week it was revealed that St James's Place has paid £121m to IFDS in order to replatform while Old Mutual Wealth spent £102m on "platform transformation" last year.

Lang Cat figures also showed that tech provider GBST is set to storm the industry by doubling its market share by 2020 so that it holds just under a third of total platform assets in the UK.

Bravura, which powers the Nucleus platform, is expected to see a 10 per cent jump in market share over the next few years to hit 18 per cent by 2020.

Mr Polson also said pricing in the retail space is converging, and earlier this month told FTAdviser that this “nip and tuck” exercise was more about aligning costs across the platforms, with the distance between platform prices narrowing.

Last week, the Financial Conduct Authority launched a market study looking at price competition in the investment platform market.

Mr Polson added: “The regulator is starting to take a keen interest in competition, and whether platforms are doing enough (or anything) to drive down costs for customers.”

David Tiller, head of adviser and wealth manager propositions at Standard Life, said: “There is no doubt that the costs associated with re-platforming are significant, as it has the potential to disrupt to adviser businesses."

The root cause, he said, is platforms' failure to continually improve their architecture and capabilities in line with a constantly evolving market.

"This forces the ‘big bang’ upgrades we are currently seeing, with the associated cost and complexity," Mr Tiller said.

"Short term profitability may be flattered by under-investment, but in the long-term the cost will come home to roost with painful consequences."

The propositions head also said these costs are difficult to recover through pricing, because fees are set by the market and quality of the proposition, pointing out that increasing prices could potentially cut future flows.

AJ Bell estimates that more than £200bn is set to move IT providers over the next couple of years.

A spokesman from the firm said: "At that cost per client it will have a significant impact on the bottom line of the platforms involved." 

He also said the impact these technology shifts will have on the platform’s profitability is now a key consideration for advisers when carrying out their platform due diligence.

Abi Stidworthy, chartered financial planner in Strategic Solutions Financial Services, said: "I am not surprised as profit margins are tight for platforms but I would have concerns of what this means for clients and the amount they pay in platform charges moving forward." 

If costs go up, then she said it could be hard to position with clients, as clients don't always see the benefit of the platform as much as they see the benefit of the adviser and the funds.

katherine.denham@ft.com