Cut costs and differentiate. It isn’t rocket science but this is the simple recipe for success if you happen to be a platform business.
The platform industry is in the eye of a near-perfect storm. Even with AUA rapidly expanding, costs have continued to outstrip revenues due to a combination of reducing profit margins and increased development spend, caused in the main by the lingering after-shocks of the RDR (removal of commission, the treatment of pre-2013 trail commission, platform re-registration, …).
According to Altus, the platform industry’s profit margins halved in the six years leading up to 2012, and I know of at least one large platform business whose average margin has halved again since then.
Of those platforms who are profitable, only a very few post double-digit profits. Many of the others deliver a very poor ROI / ROE for their shareholders, delivering single-figure profits on assets in the tens of billions.
Many retail platforms will struggle to survive unless they a) are fortunate enough to possess parents with deep pockets who look at the platform as a route to market rather than a profit-making venture in its own right, or b) they focus on the needs of a distinct customer segment and carve out a profitable niche in the market.
But whatever the platform chooses to do, one thing is paramount – it must become as low-cost and efficient as possible. This may mean changing its technology. It will almost certainly mean changing its business processes, removing paper and automating the customer experience as much as possible.
The emerging shape of the platform market. This is how I see the platform industry panning out in the oncoming months and years; in fact, the transformation has already begun. I see five types of platforms:
- Utility platforms. Most large wealth managers, networks and nationals are already looking to utilise the services of a ‘utility platform’. In this model, the wealth manager manages the entire investment proposition in-house and only requires a platform as a back-office utility for transaction processing, reconciliation, custody and reporting – at a fraction of the cost of a retail platform. All of the advice process, attitude to risk, model portfolios, investment choice and consolidation of a client’s holdings is performed by their adviser technology system (DT, Intelliflo, Time4Advice, First, …). SEI has been the pioneering poster-boy for this model and is likely to end up with competition from the likes of IFDS, Pershing and Allfunds plus a handful of current retail platforms who have been forced to re-position themselves accordingly.
- The conduits (mostly life company platforms). L&G, Skandia, Fidelity, Axa, Aviva, Zurich, Friends, Standard Life, Aegon, … have all justified investing unspeakably large sums in the development and on-going support of platform solutions. But few expect their platform to deliver significant profit (if any) in its own right. As the CEO of a leading lifeco platform explained to me recently, many now view their platform as a mechanism for servicing their adviser clients and a conduit through which to distribute profitable products such as in-house investment products, annuities, and protection. Undoubtedly, these firms will eventually use platform technology to service so-called ‘orphan’ clients and make increasingly bolder moves into the promised land of D2C.
- “Value-added” adviser platforms. I may even include Standard Life in this category, along with the likes of Transact and Nucleus and some specialist platforms such as James Hay. With the right services targeted at the right advice segments, they will be able to charge a premium. The question will be how much of a premium …
- Platform BPO providers. FNZ already offers a combination of technology and business processing services. Bravura and Citi have the potential to be a strong competitor. IFDS has now entered the market in grand style with Skandia as its first client. Is Pershing contemplating doing the same? If a platform is really just a low-cost and efficient utility, why not outsource the whole box and dice? And this question will be relevant if you are a platform provider, a Lifeco, a financial planner, a wealth manager or a network. I predict that this BPO segment will boom. But this is not for the feint-hearted; wafer-thin margins require large volumes, deep pockets and proven expertise as a business process outsourcer.
- D2C platform providers. Will a new category of specific D2C platform provider emerge? Or will the current platforms simply start doing this properly? My money may be on the former even though every surviving retail platform will need to offer a D2C capability for their advisers to ‘white-label’. Because even some HNW clients will want to do some of their investing themselves.
So, there you have my fabulous five for the future.
Which ones will be the most successful? That’s an easy one. Those who understand precisely the value they deliver to their chosen customer segments, who provide the best customer experience and who have aligned their charges to the needs of their customers as much as possible.
Of course the more important question is … Which model is the most appropriate for your business?
The second part of this article will appear next week
Campbell Macpherson is managing director of Campbell Macpherson & Associates and has held executive roles at Zurich, Openwork and Sesame