Will technology drive fees below 10 basis points?
Downward pressure on fees and charges has been affecting all corners of the retail investment market, with experts now questioning exactly how low pricing can go when it comes to adviser platforms.
However, finding efficiencies must be balanced with the ability to run a viable business, as margins for platforms remain slim.
Research from Altus Consulting finds that revenue in basis points, an indicator of margin for platforms, has fallen by 61 per cent from 54 basis points in 2011 to 21bps last year.
Here, experts and platform bosses give their views as to where platform operating costs will go in the future and if they will ever get below 10bps.
Can costs go even lower?
A recent white paper from Altus shows the average platform operating cost is 28bps.
The research found more than half of platforms service their client book for less than 25bps, which has increased from 40 per cent 12 months previously.
The asset management industry has seen increasing regulatory pressure on its costs and charges after the FCA published its market study into that sector last year. The watchdog is considering costs in its probe into the investment platform market too, with a focus on transparency and if platforms are meeting their cost disclosure requirements under Mifid II.
Altus Consulting senior consultant Ben Hammond says a 5bps run cost for platforms is achievable in the future but, in the near term, 10bps is more realistic.
To get to 5bps would be a “best of all worlds” scenario where platforms are operating as efficiently as they can on costs, including those related to sales forces, risk and compliance, and investment administration.
Hammond says: “We say to platforms to know who your customer base is, know what your unique selling point is, know what your strategy is, know the type of adviser you want to attract and therefore the customer you want to attract, and then tailor your solution for those particular needs. When we came up with the 5bps, that is basically looking at the best of all those worlds.
“It is close to the lowest unit cost but not quite. That is why 10bps is more realistic.”
Fundscape chief executive Bella Caridade-Ferreira agrees 10bps is achievable and says some platforms, including the recently launched Hubwise and Embark offerings, are not too far off that marker.
Hubwise has a flat custody fee of 20bps per account type per year that is collected each month and capped at £40 per month. Meanwhile, third party investment accounts on the Embark platform have a 15bps charge, which decreases to 10bps the more assets are placed on the platform.
Embark has a single flat charge for assets held in ISAs and general investment accounts of 15bps. Assets held in a personal pension have a 25bps charge, which decreases to 15bps the more assets placed.
Caridade-Ferreira says: “10bps is doable with operational efficiency. I don’t think that it will happen in the next two years but it is an achievable target.”
She adds: “There are a couple who are close to it but they are more institutional platforms so they are just providing the custody and the trading. In terms of full-blown adviser platforms, they’re not really there.”
Novia chief executive Bill Vasilieff says his platform’s running costs are currently around 24bps. He says it would be hard for adviser platforms to get down to 5bps.
Vasilieff says: “If you are a custody-only platform or institutional you don’t have clients so you get your costs right down. If you have got clients, you’ve got to manage them. Our average client is £100,000 or £120,000 and they come through IFAs. We have got to service the client and the adviser.”
He says some analysis Novia did on its platform last year found that half of its costs were fixed and the other half were variable.
Nucleus chief executive David Ferguson says: “The question of achieving platform running costs of less than 10bps comes down to whether we mean pure running costs or whether we also include investments in scalability, resilience and product development.
“This is not to mention the costs associated with sales and marketing which, with the best will in the world, don’t come for free.”
He adds: “I’d say pure running costs of under 10bps are already being achieved in some places, but not always where true scalability and resilience are also strong features.”
Transact chief executive Ian Taylor says: “Agreeing that it could become possible to run a platform for 5bps is easy. Agreeing that a 5bps platform would be any good for customers or make any money for shareholders is an entirely different matter.”
Director, Candid Financial Advice
Platforms should mostly be run by computer, hence pretty cheap, so I share Ben Hammond’s view that annual costs of 5 to 10bps are surely viable at some point. The current reality is, unfortunately, quite different. Most platforms employ lots of bums on seats to make up for shortfalls in their technology and processes, which pushes up cost (and some still lose money).
For costs to fall there need to be two key steps. The first is platforms successfully and cost-effectively implementing more advanced IT. There is a much better chance of this happening if platforms are run by IT-savvy folk, rather than executives who have risen through the sales and marketing ranks. The second is giving platforms an incentive to compete on price, which will only come if advisers and consumers demand it.
Where to trim the fat
Most agree that reduced platform run costs will come through automation and straight-through processing, where functions cut out humans.
Hammond also agrees with Ferguson that sales forces are an expensive part of a platform’s operations. In fact, Altus estimates one salesperson needs to bring in around £100m of assets under administration on to the platform to cover their costs.
It was agreed legacy platforms would have more challenges to cut costs but other factors, such as replatforming or change of ownership, were not thought to impact a platform’s ability to become cheaper to operate.
Hammond says: “The ones who are floating need to be in a position where you have control of your operating costs and you know what you have got coming in the door in terms of assets, then you can see where you can make a profit.”
Platforms are no different from other technology; they are ripe for a shake-up
Some years ago at a Platforum conference, Andrew Fisher, the then chief executive of Towry, forecast that platform charges would fall to 10bps. Most people thought that statement was Andrew being provocative. However, platform costs have only travelled in one direction. From a starting point of some 50 to 60bps, typical charges are 25 to 30bps now.
So, how can charges fall to 10 or even 5bps? There are two reasons:
1. The cost of technology keeps falling.
2. More vertical integration means more advisory groups will use their own platforms.
The advantage of employing one’s own platform is that you only include plumbing that supports your proposition. Adviser platforms include every last iota of functionality that supporting advisers require. Thus, you don’t have to be able to hold tens of thousands of funds or securities if they’re not in your game, and you won’t bother with lots of toys, you will use those essential to you, and best of breed at that.
You can go to Pershing or SEI to do the bits you can’t, for example, custody and fund trading. You might do the rest yourself, like Fusion Wealth, with its own technology company, or outsource.
One of the most interesting new platforms is Seccl, whose executive chairman Hugo Thorman co-founded Ascentric. Seccl describes itself as “a cloud-based, fully integrated and cost-effective settlement and custody administration system”. Seccl’s target market is advice firms, wealth and discretionary managers.
To connect with other software, Seccl employs application programming interfaces. The cost of integrations is high with old technology and insignificant with APIs. For me, the platform of the future will be modular; different bits of technology that can be plugged in or unplugged as required.
The Cofunds sale taught us that big is not necessarily beautiful, not when supported by old, expensive technology, inefficient and hard to replace. Just compare the £140m Aegon paid for Cofunds to the rumoured £2bn True
Potential is apparently seeking for its much smaller business.
When I was a boy, huge computers were situated in outbuildings.
Today, there is far more computing power in my iPad. Platforms are not different from other technology – they will get smaller, cheaper and
Clive Waller is managing director of CWC Research