What you should know before operating your own platform

One in five advice firms (18 per cent) that are using fully outsourced, third-party platforms plan to launch their own in the next three years, according to NextWealth, the research and consultancy practice.

So what is driving advice firms to operate their own platforms?

The Senior Managers and Certification Regime pushed a number of firms to consider launching a platform, says Heather Hopkins, managing director of NextWealth, as senior managers required better oversight of the advice being given in the business.

Hopkins also says the consumer duty will lead to insourcing for custody and investments. “Financial advice firms overwhelmingly feel responsible for ensuring fair value, good service, product fit and that customers understand the communication they receive,” she adds.

“They are the ones who help end-customers articulate their goals and track progress against them. This will lead more advice firms to seek to control more aspects of the customer journey.

“This doesn't necessarily mean they'll all become platform operators. It does mean they will form strategic partnerships with a smaller number of providers and rely on those firms for support in delivering the best possible customer journey.”

The amount of revenue that advice firms get from operating their own platform is quite slim.Bradley Northrop, Alpha

What launching a platform does not seem to be about, however, is extra takings. “Too much focus is put on the ability to earn revenue,” says Hopkins. “Most firms that are serious about operating a platform expect it to be cost-neutral at best. The real drivers are management information and client experience.”

Bradley Northrop, a director at consultancy Alpha, agrees, describing the revenue that advice firms receive from operating their own platform as “quite slim”. He also says the consumer duty is pushing advisers to ensure their end-to-end proposition delivers value to clients.

Citing paper statements from advice firms, platforms and discretionary fund managers arriving at different times with different branding, Northrop says: “They’ll all say different things, and it’s just a really confusing mixed up experience for the client.

“We speak to clients who are like, ‘We don’t actually know what the financial advice firm’s called’. They’ll have their money on Transact, and they’ll be like, ‘Oh, my adviser is Transact’.”

Benefits of being a platform operator

Being able to have greater control over the customer experience is one of the benefits for an advice firm operating its own platform, says Andrew Back, chief commercial officer at Multrees, a platform technology provider. This includes what and how clients pay, the type of platform experience clients receive and how clients see their portfolios.

Caldon Pike, adviser growth lead at Seccl, another custodian and platform technology provider, agrees that operating your own platform might be a good option if you want more control over client relationships.

“Perhaps you’re not happy with the service offered by traditional, paper-heavy platforms, particularly if it reflects badly on your own business, and want to improve the client experience by taking on the administration yourself.

“Your rationale might be efficiency-driven, with you hoping to build a more efficient, sustainable and affordable business by integrating your platform with your existing business processes, rather than forcing them to fit around a platform.”

It brings another, more total level of control to the overall platform experience.Caldon Pike, Seccl

Under a platform ownership model, an advice firm (or discretionary fund manager) therefore owns the client relationship in full, Pike explains. “They will likely rely on a third party for the core platform infrastructure, typically custody, client money and the technology to power the trading and settlement of investments.

“But they will now be responsible for the platform administration, under a separate agreement that they sign directly with the client. If they wish to change the tech ‘plumbing’ on which their platform is built, they can do so at any time without any involvement from the client, giving them full ownership of the technology stack and the client relationship.

“As the term suggests, when an advice firm or DFM chooses to operate their own platform, they will be operationally responsible for the day-to-day administration of the platform services. In other words, it brings another, more total level of control to the overall platform experience.”

Take-up might not be guaranteed

However, there are several things that firms need to get right if they plan to launch their own platform, says Hopkins at NextWealth.

Beyond thorough due diligence and a needs assessment, which are to be expected, she says one of the most overlooked aspects is advisers and paraplanners adopting the platform itself, with the decision to launch a platform often made centrally at a firm’s head office.

Ben Raven, managing director at Tavistock Asset Management, which operates its own platform, says: “While we do not mandate any of our independent advisers to use the Tavistock Platform, the organic take up contributes towards the overall profitability of the Tavistock Group and the value we look to provide to our shareholders.”

Northrop at Alpha cites another advice firm that he says has been able to encourage all of its advisers to place clients’ assets onto the firm’s own platform.

“They’ve been able to… demonstrate to them why their own platform is suitable and best for all of their clients, and they’ve been able to get them to use the platform. So that’s almost a key consideration and thing that firms need to get right.

“Whereas other firms, perhaps firms that have scaled through lots of previous acquisitions, will have lots of different advisers who have used different platforms in the market. And trying to get them to use the in-house platform for their clients, that’s the challenging bit.

“So how do you get them to use it for new clients? How do you get them to move the clients who are already on other platforms onto this in-house platform? That’s the challenge.

“So there’s this bit where I think firms that are already well-integrated, and are already aligned to one vision in terms of what they’re trying to do, they’ll be more successful at adopting this, versus firms that are more disparate and a bit all over the place; trying to get them to use one platform is really hard.”

Are you equipped to be a platform operator?

Another factor that firms should consider is resourcing, says NextWealth’s Hopkins. “Only 1 per cent of employees of financial advice firms work in IT. Small firms don't need dedicated IT support, but big firms planning to run a platform do.

“IT and data analytics experts will be needed to build integrations and to get the reporting and [management information] required to manage the business.

“Firms will also need client service staff to handle enquiries. This can work really well in the right business, but firms often underestimate the resource required.”

Pike at Seccl likewise says firms may need to hire new staff to resource a new platform, especially if it is being licensed to other advice firms. But he adds that some firms have been able to effectively run their own platform with their existing administrative team.

“It will also bring additional compliance and governance implications,” Pike says. “You’ll be responsible for new tasks in the eyes of the regulator, [which] could well mean you need additional permissions; for example the permission to arrange safeguarding and administration of assets. Though if you’re already a DFM, you might well have these already.”

Knock-on effects on off-the-shelf users

Even for firms that are not looking to launch and operate their own platform, the possibility to do so is putting competitive pressure on off-the-shelf providers.

“What we’ve been seeing platforms do is, one: some are looking to develop their own white-label platform capability, to compete head on with the likes of Seccl and Hubwise and say, ‘Look, we could offer this to you as an alternative solution than just our retail platform that we’ve got on the shelf,” says Northrop.

But he adds that with most of the market being powered by technology provider FNZ, it becomes difficult for a platform provider to spin off a white label.

“You end up with too many different levels in the hierarchy. So you’d have the advice firm operating the platform, you’d have [the platform provider] provisioning that platform, and then you’d have FNZ providing the technology.

“And you just create multiple layers within that. Whereas the likes of Seccl and Hubwise, they own their own technology, so they can offer that a bit more easily.”

Meanwhile, other platforms are looking at how they can double down on the service offering and consultative support they can provide to advice firms, says Northrop. “So almost recognising they can’t offer the white-label platform offering but actually saying, ‘We think for a lot of advice firms, particularly the smaller-to-regional ones, they’re never going to be able to operate their own advice platform, so let’s provide them the best possible experience, let’s help them in other ways’.”

Jackie Leiper, chief of Embark Group, an investment platform provider, says: “White labelling can be an attractive solution for larger adviser firms as it gives a more integrated technology, customer and product solution without taking on all of the expense and risk if they were to develop their own platform from the ground up.

“Embark has a number of different white-label partners and models, which have been developed depending on the business model ranging from the provision of the core technology, or adding hosting of our products or a full service which includes customer service support and administration.

“As a result, we see this area as having huge potential for growth and will continue to fully participate in this growing market. The value that white labelling can bring varies with the scale and maturity of the buyer.

“Whilst the very largest of businesses may prefer to own the full platform responsibilities with the regulatory burden, many others will take advantage of the technology provider's position as a regulated entity, and they already have the trading volumes to rapidly take advantage of the cost savings that an ‘off-the-shelf’ solution offers.

“As a result, we expect to see more white label adoption as consolidation continues in the industry.”

Chloe Cheung is a senior features writer at FTAdviser