Are D2C dynamics set for a shake-up after II-TD Direct merger?

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Interactive Investor’s merger with TD Direct to create a platform with assets under administration of £18bn and 300,000 clients is set to create a new model in the direct-to-consumer market, experts argue.

The deal, which has been agreed for an undisclosed sum and is subject to regulatory approval, will make the merged business the UK’s second-largest online broker after Hargreaves Lansdown.

Platforum head of direct Jeremy Fawcett says the deal is a result of a change in the D2C market where online stockbrokers are shifting from an “old model” of trading stocks and shares into holding shares, together with funds and pensions and other products.

He says: “The online stockbroking part of D2C is a fairly distinct and pretty static market and that’s why in 2011 TD rebranded into TD Direct Investing to show it was targeting investors rather than rapid-fire traders.

“By buying it, Interactive Investor now plans to offer its fixed annual pricing to a larger client base.”

Fawcett says fixed fees have been around for a while in D2C but are “quite a niche and new concept” in advised platforms.

Platforum research shows Interactive Investor was the UK’s ninth-largest direct platform at the end of March 2015, but was “a million miles away from the biggest players”.

Now the merged platform is the second largest, although still less than a third of the size of Hargreaves.

Chelsea Financial Services managing director Darius McDermott says the deal is the start of a “long overdue” consolidation in the D2C market. He points out last year was the first in recent memory to not see any new platform launches.

But while McDermott says TD is “a good brand” for Interactive Investor, TD is not profitable, having made a loss for each of the past four years. In the year ended 30 June 2015 its losses were £33m on £14.5bn of assets under management.

McDermott says: “People are finding it difficult to make money when they have to provide good technology, reporting and systems. Decent customer service actually costs quite a lot of money and if you have a fixed costs system, that is challenging.”

Finalytiq founder Abraham Okusanya says: “TD has 500 people to administrate £14.5bn assets. I get that in the D2C world because you need more people for the customer service but that is a contrast in the platform world where you find the likes of Nucleus administrating £11bn with 120 people. This suggests there is a cost piece for TD which is unsustainable.”

Interactive Investor, meanwhile, made a loss of £922,000 for the year to October 2015.
In a statement announcing the deal, Interactive Investor says there will be no immediate change for customers of either Interactive Investor or TD Direct. But Okusanya predicts Interactive

Investor could change the fixed pricing model for TD Direct clients in future.

Fawcett agrees: “At the moment there is a lot of noise in the market with Barclays Stockbrokers replatforming, Fidelity working on their technology and Alliance Trust Savings also integrating Stocktrade. It is great for Interactive Investor to step in doing something different.”

Expert Comment: Platforum head of direct Jeremy Fawcett

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Interactive Investor has had some good growth in assets thanks to the pension freedoms so it got some confidence to move forward as a bigger entity. It will look to use the long term opportunity of offering a fixed price service, which is different from HL, for example, which charges on a percentage of assets basis.

The fixed pricing model is more prevalent in the D2C world than in the adviser market. Now there will be two of the top five services operating with a fixed annual fee so consumers may begin to notice that there are different ways to pay for investing.

II has also a social media aspect that other platforms don’t have through its popular message boards. This will be something II will look to benefit from.