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Phil Young: How platforms come to die

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The much vaunted consolidation of platforms is unlikely to happen in the way most imagined. There is little appetite for traditional merger and acquisition activity, as the process of integrating two platforms is technically too difficult.

Every major insurance company already has a platform, and is only likely to want another to replatform by acquisition rather than make the change at the back end. Very rarely, an investment manager might decide it wants one for some reason, but that seems an unlikely move for the platform alone. It is not a seller’s market. That does not mean the consolidation and eventual demise of platform businesses will not happen, but I see this happening in three stages.

The first stage: Consolidation of new business

Most advisers have more than one platform in use, or can easily set up a new one. Uncertainty around a platform’s ownership and long-term future means the first stage is the redirection of new monies to another platform. Wholesale migration of existing clients’ assets to a new platform is unlikely at this stage, while the position remains unclear, but with little to distinguish one platform from another in terms of functionality, a shift of direction to safer ground is inevitable.

Most advisers will have platform salespeople regularly knocking on the door for just this opportunity.

We, the public, probably will not know the impact on those platforms up for sale until Q1 2016, but those working within them will have seen them already, and preparing for the second stage if they are as bad as expected.

The second stage: Consolidation of existing assets

A large platform can survive for some time without new business flows, but that requires a slashing of the resources and support which will have attracted business in the first place. Ironically, dwindling sales usually means fewer salespeople, once the towel is thrown in.

For an adviser, moving a client’s assets from one platform to another is not an insignificant task, and whilst some firms have successfully and compliantly done this in one go across their entire client bank, most will pick off a client at a time as part of their routine annual review process.

It could take one or two years for this to happen. However, there are a number of fixed costs which must be met regardless of any variable costs which can be cut out, and this leads to the final stage.

The final stage: Death of the platform

We have seen this before, when Macquarie pulled out of the UK. They handled it well, and looked to ensure every client was transferred away before the platform was finally wound up. Advisers were contacted before investors, timescales set out and alternatives recommended. Macquarie is an extremely well-capitalised business which kept a remaining presence in the UK. But it was also an incredibly small platform at the time, and had the benefit of someone who understood advisers in John Porteous.

I am not sure such an orderly wind-down can be expected in future as I cannot think of a similarly benign scenario. The FCA will have to be informed right along the way prior to any wind-up with a full plan and timescales submitted. But if the deadline for wind-up is less than a year, it will put advisers under real pressure to undertake extra work outside the annual review process outlined under the second stage. That means more irrecoverable costs incurred through an ‘extraordinary’ piece of advice. This could conceivably require an extra face-to-face meeting. Ideally you would want at least an 18-month run at this, maybe more when you include research, set up and training on a new platform.

Other issues working against a platform’s survival in these circumstances are:

  • Mandatory updates to product rules – each time pension legislation changes more IT cost is incurred even if you outsource it
  • FCA-driven change which requires technology change or alters revenue (for example, the sunset clause)
  • Fixed costs of third-party suppliers – volume deals can be negotiated for back end administrative and technology services, but costs can go up as well as down, and there is a minimum fixed revenue any third-party will want to continue providing services
  • Technology decays – a significant upgrade or replatform is required periodically just to continue to function
  • Natural client attrition – every platform after a period of trading sees client money disappear through no fault of their own, as clients retire, spend their money and die. This tends to cancel out any positive gains from market movements

So mothballing a platform is not a long-term answer, and with few trade buyers interested, a nice clean exit from the platform market does not look easy either. This continues to be a brutal part of the market, and its weaknesses are being exposed.

Phil Young is managing director of Threesixty

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Really interesting piece Phil. We are often asked about platform consolidation and totally agree that it is not as easy as some make out. Combining two books of business is not always going to work – especially two bits in the same channel (i.e. advised assets).

    Consolidation seems to work better across channels (i.e. D2C and advised businesses and workplace). Brands can continue to operate independently while gaining efficiencies on the back end.

    We have been watching closely the technology consolidations – two platforms using the same underlying tech *should* have an easier time of consolidating books.

    Again – great piece.

  2. An advisory firm and will require explicit individual client approval before migration to another platform which, with a large client base is akin to herding cats. How then can the majority of advisers respond to investment platform changes when explicit individual permission must be sought and obtained?

  3. It all depends on what you mean by consolidation.

    It would be crazy for a platform to buy another and consider running two platforms independently, unless on essentially they run on the same technology and even then the so called different platform would essentially be different skins of the same. Consolidation only makes sense due to the synergies.

    As such it is much more likely that a platform would buy another for their client and adviser bank, so the brand value itself would be lost. Take Cofunds for instance, their brand would make up a comparatively minor proportion of their value IMO however their scale would be very valuable for any purchaser.

    The actual mechanics for bulk transfers under these circumstances isn’t as difficult, establishing each client account would be a bit tricky but not too difficult with purpose built technology so the challenge would be client/adviser communication. If you make the fee structure the same, their existing website essentially the same and stage the transition across, whilst providing additional technology along the way it should be fairly painless.

    Don’t get me wrong it would be some effort though so it is more likely only worthwhile of there is significant FUA benefits, so that would discount the smaller players who are more likely to be the ones who will simply close ship if they don’t reach profitability.

    As such, Axa, Transact and Cofunds maybe could be worth the effort but the brands of one if not two of the above, may be worth more then any acquirer, so a reversed process may be more appropriate.

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