DST executive director David Moffat on more advisers becoming platform providers and why the industry is heading back to the future
As a wave of platforms announce their intention to list publicly, many have speculated about the future shape of the market. The platforms listing have all sought to challenge conventional market models.
Initial public offerings do not necessarily mark a change in direction for these businesses, although listing, in the longer term, may provide deeper pockets to fund platform improvements. But it certainly feels like the tectonic plates are shifting.
This week I meet DST Systems (formerly IFDS) executive director David Moffat, and I am keen to hear to his views. Platform technology provider IFDS was bought by US outsourcing business DST in March last year.
Moffat’s platform journey started in the 1990s at Egg, the internet bank then owned by Prudential, when a true open architecture platform was “a novel idea”. His career has taken him through the birth pangs of Norwich Union’s Lifetime platform, as well as to the chairmanship of Tisa’s Platform Council.
Moffat says: “Platforms have radically changed the nature of asset management, life and pensions, and savings. They have made advisory businesses more efficient and helped them bring down fees and the threshold at which it becomes economic to offer advice. But what they haven’t done is make platform businesses any money.”
What about Transact, now worth 30 per cent more than its initial valuation of £650m? “Its profitability is still only in the tens of millions,” Moffat counters.
In the early days, just £5bn could be seen as a threshold that would allow platforms to “break free into the Elysian fields of profitability”. Fast forward 18 years and providers like Aegon are targeting hundreds of billions in assets under management.
Moffat recalls a time where designs for platform architecture were sketched out over dinner on the backs of napkins. If he could sketch out the next five to 10 years, what would the market look like?
It remains unclear whether platforms are heading towards becoming utilities, in which case only a few can survive and charges will have to fall a lot further.
Platforms could also reinvent themselves as premium service providers offering a range from asset allocation to consulting. These players could be components of vertically integrated groups.
Moffat sees a place for a souped-up platform model offering a premium service but he does not see many survivors among such a group. To his chagrin, he thinks scale will prevail. Platforms are at the start of a melee where driving down charges will become bloody.
In asset management, like in the platform market, consolidation is both inevitable and important for Moffat.
“In the US, because fund groups have real scale, the AMC falls once funds reach certain trigger levels. So they are sharing the benefits scale brings with the end-investor. This also creates an incentive for investors to buy big funds and offers a disincentive for fund groups to launch multitudes of new funds.”
He acknowledges this approach does not work for every investment style but he would like to see more consolidation – and fast.
“We need to become more efficient and certain parts of the value chain, principally active managers, need to take less out in fees and charges.”
Advisers as platform providers
It is no surprise Moffat sees a greater role for large advice groups as platform providers: DST owns Bluedoor, the technology that powers St James Place’s platform.
He says: “The number of advisory businesses is coalescing into a smaller amount. The idea of the advice industry as a cottage industry has a certain charm but it is not helpful for robust UK financial planning. A number of these larger groups will want to provide their own platform. SJP does exactly that.”
At the moment, you can count on one hand the number of advisory groups that hold platform permissions: SJP, Tilney, Succession and True Potential. Other advice groups of a certain scale could follow Openwork and Intrinsic by using bespoke versions of adviser platforms, such as Zurich and Old Mutual Wealth, rather than institutional ones.
We have yet to reach a tipping point in consolidation where advice groups command the necessary scale to do this but it is an interesting space to watch.
Back to the future
Moffat was at university when Marty McFly appeared on cinema screens in Back to the Future. It is an iconic film but can our sector learn something from it in 2018? Moffat thinks so.
Brexit is taking us out of the European Union and a Corbyn government is in prospect. Both could drive Cold War era market volatility. Moffat, for one, is optimistic about the possible outcomes.
He sees these ingredients heralding a resurgence in interest in investing. Higher volatility offers active managers the chance to earn their stripes.
He even sees a place for the old Allied Dunbar model and a return to direct sales and commissions. “It allows firms to sell to younger people,” he says – although this may require a (quantum) leap of faith from the FCA.
Miranda Seath is research director at Platforum