Platforms are withstanding the immediate impact of the Brexit vote despite nervousness among investors.
But experts suggest the decision to leave the EU could leave the platform market vulnerable, with challenges such as pricing and fund regulation yet to be tackled.
Despite warnings that volatile markets in the wake of Brexit will put pressure on investment margins, platforms are holding up well, with research by Money Marketing suggesting assets and flows actually increased following the vote.
Here, we examine the Brexit impact on platforms so far, how advisers are positioning their platform clients and the challenges ahead for the market, regardless of how negotiations pan out.
AJ Bell marketing director Billy Mackay says platform growth has not been “derailed” by Brexit, with net inflows in July about 50 per cent higher than average monthly volumes for the year before the referendum.
He says: “While this is short-term data and much of it will be organic growth, it certainly shows that the Brexit vote has not had a negative effect on business volumes.
“This is a result of increased new inflows, with outflows remaining consistent with prior months. This may be partly accounted for by advisers withholding new investments during the uncertainty leading up to the referendum and now investing long-term funds to take advantage of buying opportunities since the vote.”
Threesixty managing director Phil Young says the Brexit vote only created “a temporary blip” for new money into platforms. He says: “People continue to be sitting on cash as it was before and since the vote but very few people were alarmed even about property funds and their suspensions – it has been a different picture compared with five years ago.”
For the five platforms that provide data to the Investment Association – Cofunds, Fidelity FundsNetwork, Hargreaves Lansdown, Old Mutual Wealth and Transact – net retail outflows reached £684m in June compared with outflows of £54m the month before.
However, the outlook improved in July, a month on from the referendum, with the same platforms seeing net retail sales of £82m.
“People continue to be sitting on cash as it was before and since the vote but very few people were alarmed even about property funds and their suspensions”
Old Mutual Wealth saw net flows increase by 17 per cent to £1.4bn in the first half of 2016 compared with the first half of 2015. Total assets held on the platform also increased by 6 per cent to £36.5bn since the start of the year, which has been attributed to strong pension sales.
Alliance Trust Savings’ assets under administration went up almost 11 per cent between the vote and the end of August, with advised AUA growing “a little more” than direct, according to a spokeswoman.
Brexit has also stimulated its trading activity, with trading up 22 per cent compared with the same period last year.
The group says there was no notable change in new accounts being opened compared with the same period last year.
The Lang Cat principal Mark Polson says: “We didn’t think there was going to be a big platforms impact with the vote but were expecting a hit more on the market and investments side.
“There is nothing systemic at a retail level but there is some nervousness about platforms as a business at an individual level because of the uncertainties the vote can bring.”
Gb2i managing director Graham Bentley says Brexit was not going to have any impact on the propensity of people to invest via a platform one way or the other.
He says: “Clearly what we have seen after the vote has been a very positive response by markets and as a consequence I suspect people have started to adjust their opinion about the investment benefits of Brexit.”
Royal London’s Ascentric platform saw AUA up 7 per cent at £10.8bn in the first half of the year.
An Ascentric spokesman says: “While the FTSE 100 dropped post-Brexit, AUA increased on the platform.
“It is believed advisers added to clients holdings or set up new accounts in order to take advantage of the volatility caused by the referendum and ensuring clients were positioned to ‘buy the dip’ in the market.”
Ascentric has seen a boost of 5.5 per cent into equity investments and flows up 8.4 per cent into investment trusts, although cash holdings remain high.
Old Mutual Wealth has seen a return from cash to risk assets, with multi-asset and fixed-income proving the most popular.
Aegon says the Brexit decision has created uncertainty but it is too early to see any specific impact on pension saving.
The platform recently posted total AUA of £9bn.
Standard Life recorded net inflows on the advised platform of £2.1bn in the first half of the year, with AUA up 20 per cent to £28bn year-on-year.
More than Brexit
Although a few platforms saw outflows after the vote, Brexit was not the only factor at play.
Pilot Financial Planning managing director Ian Thomas says: “Most platforms make money as they charge a percentage so on that basis the Brexit vote might have an impact. But there are a lot of long-term implications of the vote coupled with increasing regulation and possibly other economic challenges coming.”
Experts say outflows may have been due to replatforming exercises, such as those underway at Cofunds and Old Mutual Wealth. Others predict pressure on profits is set to continue.
Bentley says: “A lot of people could quite easily have savings invested via a multi-asset fund so there is absolutely no reason to be exposed to a platform. Advisers and platforms themselves need to think very hard about how many customers they have who have that sort of holding as to whether they are treating them fairly by exposing them to a platform cost.
“Also, there is a propensity for platforms to cost more than they earn. That challenge will remain unless platforms can differentiate among themselves.”
Finalytiq founder Abraham Okusanya says one of the possible imp-acts of the UK’s exit from the EU is going to be the possible changes in the regulation of funds, especially when coupled with the upcoming Mifid II rules.
He says: “The market is much less volatile than was expected with not much in the way of platform costs rising.
“It all comes down to how the entire process of Brexit will be managed by the Government. Without a good outcome on negotiations, revenue will be impacted. With the Bank of England cutting rates so soon after the leave vote, those platforms that rely on interest on deposits on cash accounts might resent this.”
Expert view: Bella Caridade-Ferreira
It has been two months since the Brexit vote and significant numbers of people assume that since the world did not collapse on 24 June, the worst is now behind us; markets soon stabilised and have been on the up since then.
People have a basic need to save and invest for the future and that need does not go away just because we are leaving Europe.
Although platforms are well placed to support investors’ needs well into the future, they are also parasites. They have a symbiotic and (sometimes uneasy) relationship with fund groups, advisers and investors. For nearly a year now we have been living through a period of economic uncertainty, so risk aversion is high.
As a result, while pension investments have escaped relatively unscathed, the annual Isa season got off to a slow start and flows fell well below expectations. And we have clearly seen the impact of the Brexit vote on property funds.
All in all, asset growth has been muted and patchy among platforms this year. Last year we predicted the platform industry would grow to £495bn by the end of 2016, but at £432bn at the end of Q2, growth has lagged and is now tracking between our pessimistic and realistic scenarios.
Brexit is not the only reason, but there are several geopolitical factors that point to a more difficult and adverse environment in the next three to five years. We expect the pessimistic scenario to play out and platform assets to rise to £855bn by 2020.
Mitigating the uncertain environment and working hugely in platforms’ favour is pension freedoms and baby-boomers retiring and transferring their assets onto platform. Nonetheless, pricing will be a factor, but getting the decumulation offering right and ensuring the user experience, and how seamlessly the workplace, direct and advised propositions work together will be the critical success factors in the next five years.
Bella Caridade-Ferreira is chief executive at Fundscape