Platforms are unprofitable businesses on average, the Financial Conduct Authority has found.
In the interim report of its platform market study out today (16 July), the regulator found providers on average had a negative ratio of operating profit to assets under administration.
Across the FCA's sample of 20 investment platforms, eight firms had "substantial" positive contributions to operating profit between 2013 and 2016.
There were seven firms which had total costs significantly in excess of revenues while the remaining five posted an operating profit close to or slightly above zero, pointing to a situation around break-even point on operating expenses.
Larger firms tended to be more profitable than smaller ones, the key differentiating factor for a firm’s profitability proving to be the size of its cost base.
The FCA said: "Overall, we observed some relationship between operating profit and scale, namely that smaller platforms tend to have lower operating profit margins than larger ones on average.
"However there are examples of smaller firms who manage to have similar or a higher level of operating profit margins than larger players."
The FCA also looked into whether there were barriers to entry into the platform market, with "relatively little" entry into the market in the past five years while market share among platforms has also been stable.
Mike Barrett, consulting director at the Lang Cat, said: "I don't get many advisers saying to me they wish other platforms were being launched into the market. With a few notable exceptions they tend to be happy with the platform they are using and if they are not they tend to publicly express that."
The FCA also found switching tends to be rare, suggesting customer acquisition is likely to be a barrier to entry and expansion in the platforms market.
Jeremy Mugridge, head of platform proposition at Old Mutual Wealth, said: "The study shows that there is a wide variation of profitability across the market, which depends on a number of factors including business model and size.
"Crucially, there is no sign of sustained excess profitability, which therefore doesn’t indicate a lack of competition.
"The FCA’s analysis shows that mature platforms are more profitable, which is a challenge to new entrants and a hurdle faced in most markets. However, there have been a number of new entrants to the platform market, which points to continued competition."
Steven Cameron, pensions director at Aegon, said the challenge of turning a profit in the platform market was because of low margins, which makes scale an important factor.
damian.fantato@ft.com
