Concerns about platform profitability are expected to continue as the industry awaits evidence that 2016’s big-name mergers have been a success.
Assessing the state of the platform market, Money Marketing looks at whether it will continue to contract through consolidation and how platforms can look to grow business in the coming year.
Platform consolidation activity was dominated by two large mergers in 2016, but commentators are unsure as to whether this trend will continue.
Aegon’s £140m purchase of Cofunds in August makes it the largest platform business in the market, while Standard Life’s acquisition of Elevate takes the combined business’s market share of assets under administration to 10 per cent, putting it on a par with Old Mutual Wealth according to third-quarter data from Platforum.
However, the likelihood of future acquisitions depends on evidence that those deals have been a success, and how many willing sellers are left in the market.
Threesixty managing director Phil Young says: “The acquisitions so far have both been opportunistic. Neither Standard Life nor Aegon sat there and said they wanted to acquire, it was just that Elevate and Cofunds happened to come up on the market for sale.”
Standard Life and Aegon are both working on “integration”, which includes work to update technology (Aegon’s technology upgrade is costing £80m), as well as setting up
adviser working groups around service and how the platform functions.
Aegon says 750 Cofunds staff have moved across after the acquisition and there are no job losses planned as a result of the integration.
Aegon chief distribution and marketing officer Mark Till says: “When Aegon and Cofunds announced the purchase of the business we talked about the way we thought we could primarily save costs in the business through technology and removing the duplicate software licences.”
There are also operational changes taking place at Standard Life as its customer base grows from 160,000 to 350,000 after the acquisition.
Standard Life adviser and wealth manager propositions head David Tiller says 44 people left Axa Portfolio Services, under which Axa’s wealth arm sits, as part of a review before the acquisition was completed.
Competitors are watching cautiously to see how these deals play out.
Ascentric managing director Jon Taylor says: “The data and information from those [deals] and the experience of the acquirer will educate people on whether platform acquisitions are a good thing or not.”
He says: “It will take quite a long time, if ever, to drive profit from those acquisitions. The estimates in terms of costs of merging the business is probably underestimated and the complexity of integrating those businesses is extremely high. Therefore, the investment will be high and the timescales will be long.”
Rather than consolidation taking place this year, Altus Consulting senior consultant Ben Hammond thinks there could be initial public offerings or investment in platforms from private equity firms.
Transact has signalled it is eyeing an IPO in the first half of 2018 and Hammond says Novia could be another contender, given its size and modern technology.
In a note to investors in December, Transact says it worked with its corporate adviser Evercore throughout 2016 towards an IPO.
Profitability pains to continue
Mergers and acquisitions is just one example of a trend where businesses are looking elsewhere in the value chain to inc-rease margin and ease pressure on profits.
A 2016 report from consultancy group Finalytiq showed the platform market made a combined pre-tax loss of £18.73m in 2015. This was a £26m decline on the combined pre-tax profit of £7m in 2014. The data is the most recent full-year financial information available until businesses report their 2016 fourth-quarter results in the coming months.
Of the 26 platforms analysed in the report, 10 posted a pre-tax loss in 2015: Aviva Wrap, Elevate, Old Mutual Wealth, Aegon, Alliance Trust Savings, Ascentric, Avalon, Platform One, Praemium and Zurich.
Taylor predicts the market’s profits will not improve this year as the margins on platforms come under continued pressure.
He says: “The margins across the whole of the value chain – from the adviser, through any discretionary management onto a platform, and then through to fund management – there is only one direction that price pressure will go and that is to push prices down.
“Therefore, if you are in the middle of that value chain, which is where platforms are, there isn’t going to be a natural opportunity for increased profitability.”
For Young, there are two distinct strategies at play in the platform market: businesses focused on pure scale, and businesses focused on controlling their cost base.
He says: “Part of the reason why some of them are focused on pure scale is because they are interested in cross-selling products but the platform is not viewed as being the proposition that is profit-generating for them.
“It is almost the means to an end. It is a facilitator and enabler of selling other products, such as a model portfolio service or a fund.”
Taylor agrees that the trend towards businesses owning platforms and distribution, as well as fund managers integrating with platforms, is less about focusing on the profitability of the platform than pushing up the margin on the offering as a whole.
Aegon is an example of a platform focused on scale, as evidenced by its acquisition of Cofunds. However, its intention is for the platform to generate 80 per cent to 90 per cent of the business’s profits in three to five years as it shifts away from annuities.
Till is clear the company’s view is that scale is increasingly important in the platform market.
Till says: “We are on record as saying for a business to run sustainably and make a profit for the shareholders, and create value for its users, a platform is going to need to have £60bn or so of assets.
“The reason behind that is not only does scale enable you to make a profit, but it enables you to keep investing in the business to adapt to new regulation, to invest in the proposition to improve the user experience.”
Young says a loss of control over cost base is largely behind platforms’ struggles with profit, including over-resourcing.
He says: “Some of the platforms are part of what was formerly an insurance company so they have the resources around. If you look at a completely greenfield site where you are building a platform from scratch, they have got a few hundred staff rather than several thousand because their approach is you only employ an extra body when you need an extra body.”
Profitability also has an impact on adviser due diligence, with instability posing a potential challenge to attracting advisers to the platform.
Hammond says: “Because advisers have to do their due diligence, they have to make sure they get the best deal for their customers and profitability and replatforming are going to play into that process. It is a hard balance of making a big success of the company and giving a better service to customers. The cost of replatforming clients from one platform to another can be quite a lot for an adviser so unless it is absolutely horrendous they will stick with who they are used to until they come out the other end.”
The fight over fees
Platform fees are another area to watch in 2017 after Alliance Trust Savings – which operates on a flat-rate fee basis – and Elevate announced some fees would increase at the end of last year.
Standard Life said new Elevate customers would face an average increase of 0.04 per cent in portfolio charges to support platform development. Charges for existing customers will remain unchanged, while the number of discounted fund deals will increase from 350
ATS has also announced a fee overhaul for its direct and advised businesses from February, including increasing its “inclusive” account charges for the first time since 2014. The business says the inclusive fees are changing to reflect the cost of providing the service.
Hammond thinks the fee increases “look worse” than they are, particularly in the case of ATS, where customers should expect fixed rate fees to increase as other costs go up as well.
He says: “It is different to other platforms who charge basis points on assets under administration. They are hoping to grow the AUA and the markets are shown to move up in the long term so their increasing costs are covered by that increase.”
Taylor says Ascentric is reviewing its pricing structure, but not with a view to raising prices.
He says: “You are getting much more transparency now with pricing from fund managers for advisers and you have to drive that through platforms as well. We are looking at our pricing this year with a view of how simple we can make this. We will not be making any news about pushing up prices in order to push up profit.”
Aegon, meanwhile, has promised not to increase prices for Aegon Retirement Choices clients or Cofunds users.
Advisers will be on the lookout to see all these promises delivered.
Platforum director of research Heather Hopkins
At Platforum we think there will be consolidation of assets to a small number of platforms in the next five years. Three-quarters of assets will sit on four platforms by 2022. As at Q3 2016, 44 per cent of assets were on four platforms. The share of assets on the biggest platforms has been declining steadily over the past eight years. But that is set to change.
While M&A activity will drive some of this consolidation, the more important driver will be customer choice. We have seen customers drive consolidation onto a handful of technology platforms (Google, Apple, Facebook and Amazon in particular).
I agree Google is different, but the parallel we draw is consolidation in the technology platform market has been driven by customer choice not M&A. While there will be some M&A activity the most important shift of assets will be driven by customer choice (adviser and investor).
Platforms are still relatively new phenomena. We have seen a proliferation of platforms in recent years. As the market matures a few players will gain scale and it will become harder and harder for smaller platforms to compete.
Scale players will lower fees and offer better service. They will use their scale to negotiate preferential deals with fund groups – further driving down the cost of investing. We acknowledge it is not easy to move money across platforms, but we think that will get easier.
Of course this is all dependent on the shape and structure of the advisory market.
If we see mass consolidation to a few vertically integrated firms, the platform market will still consolidate but will look very different from one where platforms are supporting a diverse and healthy independent adviser market.
If we see a thriving market of small to mid-size advisory firms, scale platforms will be even more important as they will allow advisers to exert pricing pressure on other parts of the supply chain.
A fragmented market – the one we are in now – affords very little power to the customer.