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Abraham Okusanya: A tale of two platform cities

“It was the best of times, it was the worst of times.” As I ponder the developments in the platform market over the past year, I cannot help but think about the contrasting tranquil roads of Dickens’ London and the bloodstained streets of Paris at the height of the reign of terror.

A similar contrast exists between two emerging camps in platform land: the strong, profitable players making their own way in the world and those financially dependent on a parent company, handicapped by a spiralling cost base and shambolic replatforming projects.

Transact and Nucleus have listed. AJ Bell is getting ready for its IPO. True Potential is looking for a buyer at a whopping £2bn valuation.

These independent platforms are growing up.

Meanwhile, Cofunds, Aviva and Ascentric continue to live in their parents’ basements. Alliance Trust Savings is on life support. Standard Life is hanging on to three platforms, despite the asset management arm’s headwinds and its back book being sold to Phoenix Life (aka the place customer service goes to die).

The difference between the two camps is not assets under administration growth. By this account, most platforms are thriving. And why wouldn’t they? We are in one of the longest bull markets of all time.

Likewise, fees, tax wrappers and functionality are increasingly becoming secondary factors when it comes to selecting a platform.

The paramount question for advisers should be: how likely is this platform to continue to hold my clients’ assets and deliver on its promises five or 10 years down the line? The best indicator of the answer is not found in its shiny brochure or in its sales pitch, but in its dusty financial statements.

Profitability is the proxy for the financial health and sustainability of platforms. It is the lifeblood of the business.

Sure, the lifeco platform can go years without being profitable, but that cannot last forever. Sooner or later, shareholders want to see what it adds to the bottom line.

According to our latest research, the advised platform sector reported a cumulative pre-tax loss of £36m on a turnover of £1.2bn in the year ending 2017. This compares to £56m in pre-tax losses on a £1.1bn revenue the year previous.

AUA grew 24 per cent from £403bn to £502bn in the year ending 2017, while revenue only grew 12 per cent. The effect of this is a lower yield on assets, which stood at 0.24 per cent at the end of 2017, a 10 per cent decline on the previous year.

Looking at the past five years, assets have almost doubled but revenue has grown by a paltry 14 per cent. Cumulative pre-tax losses amount to £61.3m.

We can attribute the dire financial performance to spiralling replatforming costs. This is both good and bad. On the one hand, migrating assets to new technology should improve operational efficiency and translate to the bottom line. At least in theory. On the other, by the time some of these projects are finished, the technology is already obsolete.

Given the cumulative losses so far and the cost base, some platform providers may never see a return on their capital.

Abraham Okusanya is director of Finalytiq

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