Platforms are reaching a tipping point as the pension freedoms expose creaking technology and pricing pressures continue to squeeze margins.
In a controversial state-of-the-market report last week, consultancy The Lang Cat claimed platforms are “dead” in their current form.
The report says the platform market is “struggling”, as evidenced by Legal & General’s failure to secure a buyer for Cofunds and the reported sale of Axa Wealth by its French parent group. The report argues these developments raise questions about the platform sector as a whole.
The Lang Cat consultancy director Mike Barrett says: “Quite simply, we have a (relatively) small market, dozens of suppliers, fragmented distribution and considerable downward price pressure.
“There are profits to be made, but total domination of the sort that Axa and L&G want and expect just isn’t there. We’re convinced, then, that platforms – at least in the guise that we’ve known them for the last decade and a half – are dead.”
The report argues platforms need to evolve rapidly to ensure their survival.
Barrett says: “There is an urgent need to improve back office systems and processes to drive costs out of the business.
“Equally urgent is the need to improve adviser and customer online propositions. In several cases a platform’s customer portal requires you to use a PC with Internet Explorer, and even then you can only get a valuation. In a digital world customers expect much more.”
“If platforms are going to deliver value and service to decumulating clients, they need to be able to cope with the complications of drawdown”
The report adds that platforms are not as well set up to support the pension freedoms as they claim.
Cazalet Consulting chief executive Ned Cazalet agrees platforms are failing to deliver value to those who are drawing down assets.
He says: “As the baby boomer generation retires and all the money moves into decumulation, what does a platform actually do? If they are truly going to deliver value and service to decumulating clients, they need to be able to cope with the complications of drawdown such as pound cost averaging.”
Software provider Milestone head of life, pensions and platform Kevin Openshaw adds: “Platforms have been built around the accumulation of assets. The processes around administrating those assets and taking income remain very manual and labour intensive.
“As asset volumes grow, the cost of servicing them increases. It means the scalability and profitability of platforms is problematic.”
The approach of the sunset clause in April 2016 has brought the tight profit margins of some platforms into sharp focus.
Nucleus chief executive David Ferguson says: “Clearly the financial performance of many platforms is unacceptable and it was always going to be the case that shareholders would eventually say ‘enough is enough’.”
But Zurich head of retail platform strategy Alistair Wilson says arguments about profitability have to be considered in the context of a company’s overall strategy.
He says: “There are very few platforms that are only looking to squeeze profits out of a single business area. We are a multi-products business, and our platform can be used to drive growth in other areas such as protection, pension wrappers and tax planning.”
Wilson says as well as demonstrating profitability, platforms need to show they are still prepared to invest in their systems to cope with the level of legislative change.
He says: “Platforms need to be able to adapt to things like pension freedoms, reform around rebates, and changes to the personal allowance. There is also a raft of issues coming down the track that platforms will have to evolve to cope with, such as the advice review and Mifid II.
“Platforms need to prove they are in for the long term by continuing to reinvest. If not, the level of financial planning advisers are able to carry out will be challenged.”
FundsNetwork head of advisory services Jon Everill argues many platforms are backed by bigger groups that are themselves “very profitable”.
He adds: “It is more about the strategic importance a platform offers to the wider business. It is not easy to make money on platforms, but it is about reinvesting to drive efficiencies in what is a high volume, low margin business.”
If platforms are unable to upgrade their technology to become more sophisticated in the decumulation space, some argue they could even be replaced by back office technology providers.
“A large platform can survive for some time without new business flows, but that requires a slashing of the resources and support”
Cazalet says: “Platforms were never designed to deal with holistic financial planning. But how do advisers manage having all the assets on the platform, and all the technology software elsewhere on back office systems? They end up being torn between two computer screens.”
But Iress UK managing director Simon Badley says: “We have no plans whatsoever to get into the platforms space.
“What we will see is greater integration between back office providers and platforms so the two work together seamlessly and there is no need for advisers to struggle between the two.”
Everill adds: “I don’t think you could do away with the platform altogether because the platform is providing functionality that the back office system can’t, such as custody and dealing with assets.
“Back office providers have aspirations to integrate more deeply with platforms, but they don’t have aspirations to take over completely.”
The problems of the market have been highlighted by Legal & General’s failed attempt to offload Cofunds, and Axa’s decision to put its wealth management business Axa Wealth up for sale, including the Elevate platform.
The collapse of takeover talks with AJ Bell leaves Cofunds in a tough position if it is unable to find another provider.
Industry sources have told Money Marketing that L&G will either have to spend tens of millions of pounds upgrading the platform’s technology or run it down. Cofunds says it plans to continue to invest in its existing technology.
Threesixty managing director Phil Young says: “There is little appetite for traditional merger and acquisition activity, as the process of integrating two platforms is technically too difficult.
“Every major insurance company already has a platform, and is only likely to want another to replatform by acquisition rather than make the change at the back end.
“Very rarely, an investment manager might decide it wants one for some reason, but that seems an unlikely move for the platform alone. It is not a seller’s market.”
Young says platforms may be wound up if a buyer cannot be found, but doing so won’t be easy.
He explains: “A large platform can survive for some time without new business flows, but that requires a slashing of the resources and support which will have attracted business in the first place.”
But Platforum research director Heather Hopkins says: “While it certainly isn’t news that platforms as transaction engines are dead, there is still plenty of life left in these beasts, and we see several models emerging, including vertically integrated businesses. We don’t expect to see consolidation in the platform market for at least the next two to three years.”
Fernquest Financial Planning
I have done some complex drawdown cases with a couple of the provider-owned platforms and they were pretty slick. However, there is a big difference between platforms, and some need to upgrade their technology. Clients want to be on a platform which is around for the long term.
There are way too many platforms in the market and return on capital is a big problem. Life companies such as Standard Life and Axa have invested much more than the established players like Nucleus and Transact yet are making similar levels of profit.
A lot of the life companies have come into the market for defensive reasons. Aviva, for instance, was not trying to go head-to-head with someone like Transact, but to protect its back book. The investments made by the life offices do not stack up as a business decision.
Beyond the financials, there is the question of what does a platform do? It is basically somewhere to transact and view the value of your investments. As the baby boomer generation retires and all the money moves into decumulation, what does it do for them?
Platforms have been struggling with building up assets, re-registration and preparing for the sunset clause. They have been under the cosh for the past few years, so when you talk to them about decumulation and technology they say ‘we need to put the fire out first before repainting the hallway’.
The platform market should be looking at major players such as Google and Amazon who are gathering data and making life easier for consumers. Some may say that has nothing to do with financial planning but they are wrong: it is about taking information, coming up with a plan and providing a service.
Ned Cazalet is chief executive of Cazalet Consulting