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David Ferguson: Is this the crunch point for legacy business models?

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The end of 2015 will bring down the curtain on 12 months which has so far seen the market share of the three big platforms slip beneath 50 per cent for the first time since the UK platform sector was born, from an all-time high of more than 90 per cent.

The new retirement rules and the imminent sunset clause will further accelerate this trend, particularly when you throw in the complex and massive replatforming challenges faced by the three platform giants.

This sector consists of maturing millennial start-ups and legacy providers still trying to reinvent themselves for a future which has already started. The tiresome claims that the new starts would never turn a profit have proven hollow, and the downsizing establishment must now find a sustainable economic model.

Whether exposed to replatforming or a vendor-led rewrite, there are precious few platforms today operating on the same core technology they will be running in 2025 or 2030. This is a massive due diligence point for advisers as the ability to innovate or run cost-effective operations are primarily dependent on having the right technology stack.

At least two major insurance groups are reported to have thrown in the towel and this should be a warning to others. Maybe we are finally seeing the crunch point for the legacy business models (and cost bases) which carried us this far? Aligning the purpose, cost base, pricing, technology and proposition of a platform while facing the threats posed by encroachment from existing and new back office and client systems is not a trivial task.

And even for those who can execute on this, it is unclear where the recent spate of M&A activity might take us and also what role platforms may have in any wide-scale vertical integration.

Platforms play different roles for different types of shareholders and this distinction may come to define the future market. One group sees platforms as infrastructure vital to connecting the retail market, the other sees them as distribution channels for in-house fund management. The former need to be self-sustaining while the latter can (theoretically) afford to lose money forever as long as fund flow is strong and fund managers are able to overcome unprecedented transparency, distribution, charging and competitive challenges.

In terms of vertical integration, it seems odd to me this is really only discussed in terms of manufacturers acquiring distribution. On the flipside, the most important moves have arguably been by the likes of True Potential and Enable which have deployed vertical strategies to improve the efficiency of advisers and in turn pressurise manufacturing margins. Vertical strategies thrown together to secure distribution seem likely to succeed only where the component parts have substance and merit in their own right.

All of these matters pose questions of future relevance.

Either way, successful platforms are increasingly viewed as valuable strategic assets and the decisions made through the next six to 12 months (and the subsequent execution) may set the tone and come to define the retail market for the next 10 years.

By the end of that period it seems inevitable that platforms will knit together the entire retail market, almost regardless of some of the other market dynamics which might develop.

To win, future platforms simply need to provide infrastructure so it is easier for advisers to create better outcomes for clients, or for clients to create those outcome themselves, where there is no role for an adviser. They must do this on a 2020 cost base, not a 1990s one.

Today’s platforms remain focused on product and investment administration but need to develop so their position as the source of the truth is integrated further into the end-to-end user experience. The winners will blend the substance of a large regulated firm with the mindset of a tech firm to safely support the delivery of the brilliant but ever-changing outcomes that customers demand.

The losers will be the shallow and the slow, whether constrained by mindset, corporate culture or legacy cost base or perhaps even those stricken by the sunset clause or replatforming.

Future pension changes aside, the regulatory challenges have now eased. The commercial challenges are far more important and will be much harder for some.

Bring it on.

David Ferguson is chief executive of Nucleus

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