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Consolidation culture

Two thousand and six has certainly been the “year of consolidation” in the adviser software market, with many of the best known software providers changing ownership.

If you take into account the deals that took place at the end of last year, we have seen two of the best known client management systems, 1st and Quay, both the major research systems, Defaqto and Synaptic, as well as Webline, one of the biggest portals, change hands in just over a year.

In addition, in the mortgage market, we have seen each of the main mortgage sourcing engines acquire a mortgage client management system, with Mortgage Brain acquiring CDS’ The Key and Trigold buying Dashboard.

Many people, me included, have long believed that such consolidation was necessary in order that those organisations delivering technology to advisers could achieve economies of scale. Such moves also have the potential to deliver far more integrated technology offerings to advisers. This should bring with it significant improvements to business processes and these in turn can be expected to reduce adviser costs.

The fruits of this consolidation are beginning to be seen in the market, with Capita having recently showcased the integration it has delivered between the Quay and Webline systems. Equally, Vertex recently won the new mandate from John Scott and Partners and I understand that this was substantially driven by the integration being delivered by the Adviser Office system from 1st and the Exchange portal.

One of the most important benefits should be tighter integration between the capture of “know your client” data in the fact find and the reuse of this data.

The strategy of offering access all the way to the adviser’s desktop can certainly be seen as a successful way of winning major outsourcing contracts from life insurers, both for the existing books and new providers. Capita, in the last 12 months, has notably picked up outsourcing contracts from Prudential, Zurich and Met Life. Vertex, meanwhile, seems to have made something of a speciality of attracting new entrants such as Living Time in the annuity market, Gartmore for its personal pensions unit trusts and Deutsche’s entry into the mortgage market.

Increasingly, when I talk to senior management at life offices, there is recognition that, when it come to selecting an outsourcing provider, having the reach to the adviser desktop that these consolidation plays have achieved makes them far more attractive.

It means that in reality any other potential outsourcing partners who make a supplier shortlist are makeweights. The access to advisers makes the supplier choice really a two-horse race.

This does actually make it more than a little strange that United Utilities has decided that running Vertex is not core to its objectives. It is, however, worth recognising that in putting the Vertex business up for sale, it is disposing of a business that is a key piece of the life and pension industry infrastructure which has made significant strides forward. It is hard not to see how being owned by an organisation with a better appreciation of our industry would not put it in an even stronger position.

Let’s be honest. The Exchange management, and they are the people running the life and pension side of Vertex these days, have shown themselves remarkably capable of getting on with running the company despite various changes of ownership in the last few years. This is not to say that being up for sale again can be anything but an unwelcome distraction. Hopefully, this time they will be acquired by a company that is in it for the long term.

We have not yet seen consolidation deliver a package of applications to advisers with pricing incentives but it is as only a matter of time. The priority must be for these organisations to build the integrations that will enable them to deliver greater value to advisers.

Where does this leave AssureWeb? Recent events make me more convinced than ever that it would be far better placed to serve the market if it was part of an independent technology supplier rather than being owned by a handful of product providers. AssureWeb needs the financial resources to develop further services. Providing such development capital for software businesses is hardly the core business of life and pension providers.

I am in no doubt that a third properly funded portal operation would be a good thing for the industry. However, as it stands, AssureWeb seems to be the poor relation of the portal market. I would expect it to become increasingly more difficult for them to attract and retain adviser customers if they cannot be seen to have access to further development capital in order to keep up with the very obvious advances being made by both Capita and Vertex.

Right now, the burden of providing such capital would appear to fall disproportionately on the current shareholders whereas a wide group of providers benefit from AssureWeb’s activity. My market intelligence suggests to me that if the current situation continues, the recent defection of Lighthouse from AssureWeb to The Exchange is unlikely to be an isolated incident. I do not, however, believe that expanding shareholding among other insurers is the right way forward.

AssureWeb represents a key component for anyone wanting to start a third consolidation play. While there are several other client management systems available, although only two or at most three are really worth anything, there is only one portal player that is not already part of a consolidation play. As such, it must represent an opportunity for those life companies which have made a significant investment in the business over the last decade to recoup some of their expenditure and allow others to provide the necessary development capital to take AssureWeb forward and secure its position in the long term as a viable third option for advisers.

It does not take a rocket scientist to work out that at some stage, consolidation plays in the life and pension market need to hook up with those in the mortgage market. We have a common regulator for both and sooner or later a degree of harmonisation between the investment COB or should I say Newcob and Mcob must be a natural conclusion. On the other hand, the sourcing engines clearly need to evolve further if they are to be able to properly take account of lenders’ affordability calculations as income multiples become a thing of the past. This means anyone trying a consolidation play in the mortgage market is almost certainly going to have to spend some serious cash developing new functionality.

All in all, if 2006 has been the year of the deal, I suspect there are a few more to play out during 2007. Watching from the sidelines is going to be fascinating.

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