Can advisers cut out platforms with in-house alternatives?

Technological advances pose fresh headaches for traditional providers

The platform market has been ripe for consolidation for a number of years. Competition has led to downward pressure on fees, but as platforms struggle to differentiate themselves – and protect margins – many have launched additional tools, which are not always wanted by advisory clients.

Opinions vary as to how fast, and how far, this consolidation will go, with some predicting the 20-odd platform providers currently may shrink to just a handful.

Alongside this, another trend is starting to emerge.

A number of larger advice firms are building their own bespoke platforms. These deal with a range of core functions, from support services for wealth managers, investment administration and portfolio management, to tailored technology, custodian services and client reporting.

Finance & Technology Research Centre director Ian McKenna sees this as a “natural evolution” for larger advice firms looking to scale up.

He says: “There has been a significant appetite for this for a number of years, and it’s really a matter of the technology catching up with adviser aspirations which is making this possible.”

The Lang Cat market analysis manager Terry Huddart agrees.

He says: “We are definitely seeing a growing desire among advisory firms to build their own platforms, rather than take an off-the-shelf solution.”

Huddart says there is considerable adviser dissatisfaction with the options offered by the main platform providers. Many now charge for a range of “bells and whistles” that may not be needed.

But, as he points out, having an in-house platform equivalent is only a realistic option for firms of a certain scale.

To date, it has been the larger  wealth management firms and national IFAs that have developed their own platforms. True Potential, for example, made the decision last year to move away from using a third-party provider and build its own bespoke system. The company has close to £9bn in assets under advice.

Chief executive Daniel Harrison says: “As an organisation, we have always tried to build our own technology products and processes, so it was a logical step for us.

“Having control means we can choose what to add next to our platform in terms of new features or benefits, to both advisers and the end investor.”

Harrison says the in-house platform offers a range of services, from tax wrappers to discretionary fund propositions.

Building an in-house platform gives advisory firms the opportunity to switch to a different cost model.

Rather than clients paying a separate platform fee – over which advisers have no control – firms can enter into a commercial agreement with technology companies to design and build an in-house system.

This allows advisers to either absorb the technology costs, allowing for more competitive client charges, or roll a charge for offering the platform service into their own client fee.

Platforms adding needless tools in ‘paranoid’ bid for survival

McKenna says: “The advice firms should have more control over what they are paying for services. The question is whether they choose to pass on savings to the end customer.”

He adds: “Inevitably, this is moving firms towards a more vertically integrated model.

“While this is frowned upon in some circles, in reality most firms are now concentrating their platform assets with two or three main providers.

“Provided in-house propositions are being built to meet the needs of the consumer, then you have to ask, where is the problem?”

There are a number of options for advisers looking to go down this route, with a variety of technology companies specialising in providing bespoke services.

SEI and Pershing, for example, work with larger wealth management companies to build bespoke systems, based on the scale of the business and the services offered.

Multrees also offers a modular service for wealth management firms. Whereas firms like SEI tend to use their own technology, Multrees has adopted an open architecture approach, using API technology to weld together tailored solutions.

Multrees chief executive Chris Fisher says this modular approach has clear benefits in the financial advice sector.

He adds: “Every company has its own way of doing things; its own priorities, its own needs and objectives. It is entirely logical that service propositions are built with those characteristics at the forefront and not as an afterthought.”

Of course, while an in-house platform may offer some advantages to larger adviser firms, it is clearly not a viable option for many.

Sanlam UK head of distribution Richard Pursglove says: “Outsourcing, whether it’s for custody, dealing or settlements, for example, is a well-trodden path in the UK.

“Keeping all these functions in-house is extremely expensive; it’s all about scale, with technology and healthy competition driving down the cost of outsourced solutions.

“Only the very largest adviser businesses in the UK could maintain their own platform, and that’s if they have been fortunate enough not to get fouled up with clunky legacy systems.”

Consultant Rory Percival, a former technical specialist at the FCA, says most advisers will not have the capability to set up their own trading or custody arrangements, and points out this presupposes they have the “appropriate discretionary permissions on portfolios, and are prepared to jump through additional hurdles on competence and control”.

Percival says advisers are required to review their platform arrangements to ensure they are meeting client needs. This would also include any in-house system.

He notes that in some cases, platforms may not be necessary and much will depend on how advisers segment their client banks.

For example, a third-party platform might be useful for clients transitioning to retirement, who have more complex needs and a number of pensions and investments.

This may contrast with those in accumulation, building funds in pensions and/or Isas.

Here, a life insurance option, which does not necessarily utilise full platform services, or the associated costs,  might be more appropriate.

McKenna says: “I would expect the FCA to ask firms [building in-house platforms] to identify which customers need in-house solutions, and which do not.

“What is the process for finding the alternative and what percentage of their customers end up having their needs addressed in different ways?”

But while cutting out platforms may only be a realistic option for the largest advisory firms, Huddart predicts this may change in the future.

The cost of building in-house systems is likely to fall as the technology improves, the process becomes simpler and there is more commoditisation of the various core services, Huddart says.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Must be a quite day. Almost 3xactly the same could have been written 10 years ago. Before then, smaller advisers were even clubbing together to build platforms, e.g. Ascentric and Nucleus, both of these encouraged by the late Paul Bradshaw.

  2. Some good observations here. Advisers can have more control over their relationship with clients and the whole value chain. Both new software and new Custody propositions are available. The article didn’t mention Seccl but I have now! Disclosure I am a director!

  3. Maybe there is room for a platform provider to offer a fixed fee platform , so the company just pays 1 fee every month , the fee is the same regardless of how much is invested on the platform

    • Problem is Mike that the fee would likely be more than you’d want and more than clients with small portfolios would pay…..

    • Look at the Share Centre. Fixed Fees. I never understand why they are not more popular. Indeed they rarely appear in Platform surveys and on those rare occasions that they do, the statistics are either wrong or misleading. They are in fact one of (if not the) cheapest around. (Unless you trade like a Dervish).

  4. Others seem to think that blockchain will herald the demise of platforms but I think it will reduce platform costs considerably and make them more efficient. Going back further, in the days when there were even more life companies competing for business than there are platforms now, no-one suggested that the sector was due to consolidate. Perhaps it was less obvious that they were all offering much the same thing!

  5. Here we are the industry moving forward, looking to the future, and developing alternatives that can only be good news for its clients and the consumer as a whole.

    And yet the Metonym of the FCA harps on about stoneage regulation, client segmentation, permissions, control and the need to jump through the regulatory hurdles !

    The FCA rulebook will never has been or never will be, a timeless classic or even worked, its about time its lead to the hangmans noose, and sent back to the stoneage whence it came

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