Advisers urged to dig into platform finances

Advisers urged to dig into platform finances
Credit: Simon Dawson/Bloomberg

Advisers have been encouraged to dig further into a platform’s finances in the due diligence process, as warnings are sounded that financial strength is not a “hypothetical risk” and has “never been more topical”.

According to AKG Financial Analytics, advisers should probe a platform’s financial strength and sustainability when conducting checks alongside typical avenues such as proposition and operational factors.

A guide from AKG, sponsored by Aegon and seen by FTAdviser, urged advisers to explore a platform’s ability to invest in continued platform improvements, check it boasts strong and resilient key business performance indicators and look for a clear business growth strategy.

Matt Ward, communications director at AKG, said: “Financial strength is not a hypothetical risk. Due diligence is an ongoing process and requires regular consideration.”

Factors to consider when assessing a platform’s business strength included its market share, the strength of its management team and how diversified its revenue was, while a firm’s corporate governance and environmental performance could show how sustainable a company is.

In terms of pure financials, advisers were encouraged to check a platform’s liquidity position, revenue growth, turnover ratios and its cost structure for signs it was able to stay afloat.

The report said: “There are a couple of common, but understandable misconceptions associated with financial strength assessment.

“Firstly, that financial strength is purely about solvency. It is not. Whilst solvency will always be important and a factor in financial strength assessment, it is not the whole picture.”

AKG added that advisers often fell into the trap of believing that financial strength was simply about the “recovery of client assets”, but urged that this was not the case.

“Recovery of assets is of course crucial, but … [you are] effectively saying that if that part of the customer value chain, somehow fails or is impaired, there will be no change in customer experience.

“Unfortunately, that simply is not the case. The route to asset recovery or protection funds/compensation is not the experience the customer reasonably expected when they signed up. And the uncertainty, delay and distress cannot be so easily dismissed.”

There were a number of red flags an adviser can look for when monitoring platforms, the report said.

These included a lack of transparency in reporting key financial data, indifferent performance against key financial metrics and an inability to raise investment funds.

Other warning signs were operation cost cutting — such as organisational restructuring, staff redundancies or office closures — or any abrupt changes in strategic direction or corporate restructuring.

AKG said a raft of senior management departures, a sluggish response to regulatory changes or being the subject of specific regulatory scrutiny should also alert advisers.

Ronnie Taylor, chief distribution officer at Aegon, said matters of financial strength and the ability of a platform to keep investing in their proposition and service had arguably “never been more topical” given the headwinds facing all businesses due to Covid.