Consolidation in the platform market has been expected for many years because, the argument goes, the low margins and complexity of operations require players to have sufficient scale to compete.
We have now started to see some of this activity in the market. Interactive Investor’s acquisition of Alliance Trust Savings is proper consolidation – two well-established investment brands being fused into one.
To some extent we’ve already seen this play out with Aegon and Cofunds. Less so with Standard Life and Aberdeen, which was more about reassembling a vertically integrated business and achieving better balance between the components of asset management, platform and distribution.
As a direct-to-consumer play, Interactive Investor has spotted an opportunity to establish itself as a large player with distinctly different pricing. For all but the smallest investors, its fixed annual fee is cheap compared with all those platforms that charge a percentage of assets held.
This is at a time when we find consumers are more price sensitive and are becoming aware that some services will cost them more than others. Interactive Investor wants investors to notice this and its aim is to become the obvious alternative.
So, this play is all about participating in the long-term success of the D2C investing market. Its reverse takeover of TD Direct Investing in 2016 made it the number two D2C player.
While still less than half the size of Hargreaves Lansdown, its newly acquired assets make it almost double the size of its next closest D2C rival, Fidelity. But rather than attempting to copy Hargreaves Landsdown’s approach (many have tried and failed), Interactive Investor is presenting a clear alternative based on price.
What we don’t know about Interactive Investor’s strategy is its intentions in the advised market. The Alliance Trust Savings platform is split roughly equally between D2C and advised. It is the only platform to offer a fixed-price model in the adviser market, making it distinctly attractive for some client segments.
But, the platform was barely profitable and has struggled with its technology upgrade, and this has caused some reputation loss among financial advisers.
Interactive Investor doesn’t have an advised business and we don’t know whether it will ditch this market sector or use its new acquisition to build a more integrated wealth management business. It’s scale gives it some options on the future roadmap.
There are precedents for breaking out of the D2C channel. The purchase of Bestinvest by private equity house Permira, back in 2014 evolved into the current Tilney Group – an integrated wealth management business with over 300 financial advisers and significant DFM capability. That wasn’t necessarily the direction expected from the initial investment in a D2C brand.
With flat fees, growth depends heavily on customer acquisition, which is pricy – just ask Nutmeg. Like Tilney, Interactive Investor has weighty private equity backers who have provided the firepower to sneak up on Hargreaves Lansdown and which might allow for further strategic acquisitions in the future.
Alliance Trust started life supporting nineteenth century pioneers who chose to farm in Oregon rather than prospect for gold in California. But while the farmers prospered, the forty-niners were invariably disappointed.
The new owners of Alliance Trust Savings will need to choose their direction wisely.