In a very short space of time, investment platforms have grown to occupy a prized place at the very heart of our industry, administering around £200bn of retail investments. However, due to a lethal combination of RDR, growing consumer awareness and ever-increasing competition; life is about to get a whole lot tougher in the over-crowded platform market.
In fact, in my humble opinion, those platforms that aren’t able to cope with the new low-margin and highly competitive world ahead will cease to exist.
“Has he gone mad?” I hear you ask. Billions of pounds are pouring into platforms every quarter. Assets Under Administration have increased by 25 per cent in the last year and could triple over the next five years. Platforms are a vital component of every adviser’s RDR strategy. Every life company has one. Every network has partnered with one. Even banks are launching platforms. This is gold rush time.
Precisely. And in a way that is reminiscent of the heady days of the Klondike, some platforms will strike it rich, some will waste a fortune for little return and others will be gobbled up by more successful and better organised competitors. Of course, history tells us that it is the mining suppliers who made the real money in the gold frenzy of the Yukon, California and Victoria, which augurs well for the likes of FNZ, GBST, Bravura and BlueDoor.
The gold rush mentality has produced a platform market that is over-populated with feature-rich and well-funded competitors. This intense competition can only lead to lower margins, an impact already being felt across the industry. Transparency of platform pricing will inevitably place further downward pressure on the fees platforms charge their clients, and these margins will be under even greater threat with the growth of direct-to-consumer offerings post-RDR.
So, any platform that wishes to succeed in the inevitably lower-margin world must itself be “low cost”; it must be as automated and efficient as it possibly can be. If your platform doesn’t have a low cost:revenue ratio, or a credible plan to lower it, it may be time to start looking for an alternative long-term supplier.
The crowded marketplace
Utilities: At its core, a platform is simply a utility; a trading and custody mechanism for funds and other investments. Advisers can use these utility platforms as the bedrock of their service to their clients and add on whatever investment proposition and point-of-sale experience they wish to deliver. SEI, for example, makes no bones about this. It delivers a straightforward custody and trading platform that works, and they integrate their system into whatever components their customers have chosen. This model has been selected by some very large adviser groups since SEI’s launch. I can see many other platforms following suit; perhaps not always by design.
“Retail” platforms: However, most platforms are desperate not to be pigeon-holed as utilities. They have chosen to assist advisers to build their investment propositions by offering packages of investment products, tools, services, managed portfolios and whatever else they think advisers may need to be successful. The competition among these “retail” platforms is already fierce and growing in number (from the old grandees of the industry in Fidelity FundsNetwork, Cofunds and Transact to the bright shiny newcomers of Nucleus, Novia and Ascentric. And if this competition was not tough enough, advice firms, networks, fund managers and POS/CRM vendors are all working very hard to eat in to their margins.
Life companies: It appears that a platform is now the must-have accessory for every life company. No. That’s too flippant. Without a platform, a life company may just as well close their savings and investment arms, for the platform will be the saviour of this part of their business post-RDR. Yes, that’s better. The likes of Standard Life, Aviva, L&G, Skandia and Axa realised this a long time ago. Even before the acronym RDR had been thrust into our collective lexicon, they saw the power of the platform overseas and decided that it would be crucial to the future of the UK industry as well. These companies have now “bet the farm” on their platforms, ironically having spent tens of millions to lay the foundations for the new lower-margin world. The biggest advantage the life platforms possess is the army of “broker consultants” at their disposal. Their challenge will now be how to decrease costs whilst retaining their ability to assist IFAs make the transition to a post-RDR world.
POS/CRM: What’s the first screen an adviser logs onto in the morning? Outlook. OK. What is the second? It is DT or Intelliflo or 1st or Time 4 Advice – their point of sale / CRM system. These systems now also provide a comprehensive range of managed portfolios, research, investment tools – in fact many of the additional components that a “retail” platform is packaging up for advisers. For the simple reason that no-one will want to pay twice for these things, I predict that POS/CRM systems will be positioned to take a large bite out of the margin currently enjoyed by retail platforms – and in time start to bypass them altogether and simply link to an increasing number of utility platforms.
Direct-to-consumer: The combination of fewer investment advisers post-RDR, the fact we are all getting used to doing things ourselves online and the imminent arrival of an entirely new generation of investors who have never met an IFA, all point to the inevitable conclusion that D2C will be a big growth area for the future. Tomorrow’s consumers won’t put up with paying outlandish upfront charges to buy investment products, nor will they agree to squander large numbers of “bips” in annual maintenance charges. They are even likely to seek investment recommendations from their friends rather than take advice from a qualified professional. The growth of consumer-facing DIY investment portals will inevitably place further pressure on platform margins.
So, in order to be among the winners, platforms must do a few key things:
1. Maximise efficiencies. Straight-through-processing, more automation, remove paper, streamlined processes … your operating costs must be as low as possible in the lower margin world ahead. There is no alternative to this.
2. Functionality. Ensure your platform functionality keeps up with your competitors.
3. Usability. Ensure your platform is easy to use and you have a dedicated team focused on continually improving this key part of your customer experience.
4. Look at other parts of the value chain. Now that you have the hygiene factors above out of the way, you may want to look for other ways to increase your revenue streams. Lifecos, networks, banks and even fund managers have all moved into the platform space. So, equally, platforms have the opportunity to move into product manufacturing, investment management, non-investment products, D2C, perhaps even (heaven forbid) the world of advice itself. Tentative steps have been taken in the past. Bolder steps will be required in the future. No holds will be barred in this new hyper-competitive world.
5. Genuinely focus on your customers. And finally, as always, the crucial thing any and every platform must do to survive (and perhaps even thrive) in this new exciting world is to know which advisers it is seeking to service and why; genuinely understand their needs, wants, challenges and aspirations; and then design its propositions accordingly. But perhaps even more important than all of that will be the realisation that your success is dependent upon the success of your customers.
For platforms are in this sense no different from any other business-to-business company. Their future success boils down to their response to one key question: “What do I have to do help my customers to be more successful?”
If I was an IFA, the platform that best answered that question for me is the one that would receive the lion’s share of my business.
Campbell Macpherson is managing director of consulting firm, Campbell Macpherson & Associates. His career has included executive roles in Openwork, Zurich and Sesame.