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Platform pressure: Will stock market floats breed adviser conflicts?

As the first adviser platform to float on the stock exchange, Transact’s initial public offering this month marked a watershed moment for the financial planning profession.

There has been talk in the market for years over whether the likes of AJ Bell and Nucleus would take the plunge too, with speculation over both names hotting up again in recent weeks.

Yet questions remain over whether publicly listed platforms present conflicts of interest for the advisers using them, and the impact on charges and service levels once private investors enter the fray.

Runners and riders

Transact, under parent company IntagraFin Holdings, took to the main market with a £650m valuation on 2 March. The float came on the back of a strong financial performance for the platform, which saw profits increase 43 per cent to £29.9m and funds under direction reach nearly £28bn.

AJ Bell, which is also mulling a float according to reports last month, could achieve a similar valuation based on its financials. The platform has £40bn of assets under management and reported pre-tax profits of £21.7m in the year to 30 September 2017.

Nucleus is understood to have appointed brokers for its own float, and even though it has fewer assets, around £13bn, it could still achieve a market capitalisation of more than £100m. Again, profits were up more than 20 per cent, reaching £4.3m last year.

Embark, the parent company of Sipp and SSAS firms Hornbuckle and Rowanmoor, said it was also planning a float at the back end of last year. This could take its platform businesses, including Avalon, public as part of the deal.

Embark chief executive Phil Smith told Money Marketing in November that an IPO was on the “medium term agenda” for the firm.

He reiterated that the company had begun preparations for a stock market float this week as a “natural part of the evolution” of the company.

Being the first of a particular kind of business to float, as Transact has been, would likely mean that its valuation will be higher than those previously mooted.

But banks and brokers will be keen to push future valuations as high as possible to extract the greatest possible deal-related fees. They also have a compelling story to tell about increasing complexity and need to help savers since the pension freedoms, so float prices are likely to remain high.

But despite such strong growth for parts of the market, some commentators have questioned whether platform businesses will be an attractive investment proposition for anyone outside the advice profession.

Adviser view:

Anna Sofat, managing director, Addidi Wealth

Floating allows the platforms to access a much wider range of shareholders. Your advisers have come to you because of your independence, particularly Transact and Nucelus, so to sell to an insurer wouldn’t necessarily sit incredibly well either with the management or advisers. In a way, listing is an option which fits in with their business models. If you are an original shareholder you will end up with some money out of it eventually, but I’m not sure advisers will face many issues.

Platforum research director Miranda Seath says: “Platforms operate on wafer-thin margins and are not immune to the price pressures that are squeezing the retail investment value chain.

“Platforms need scale to combat margin squeeze or they need to diversify what they offer — though profitability is less of a concern if the platform is part of a vertically integrated group.”

Money Marketing understands that platforms including Transact had explored the possibility of a trade sale on a number of previous occasions, but had failed to find a suitable deal.

Increasing the amount of private investment into platforms could be a double-edged sword. On the one hand, it could provide badly needed funds for technological improvements. As the cost of replatforming projects using outsourced technology providers continues to spiral, platforms could benefit from economies of scale as they can afford greater in-house resource to cope with adviser service and upgrades.

However, particularly if private equity companies become involved as investors, they are going to demand significant returns on their capital, perhaps more so than usual given the inconsistent nature of profits in the platform space. This could increase the upward pressure on platform fees, given that research suggests that advisers are not particularly price sensitive when it comes to platform choice once they are locked in.

Platforum research suggests that while low charges are the most important factor for advisers looking to place new assets on a platform, they rarely correlate with service levels received – the third most important factor for adviser platform selection behind investment choice.

Anecdotally, advisers report service issues with their existing platforms as being a much more powerful influence over repeat business that pricing changes.

If performance stalls, more external investment runs the risk of precipitating a platform’s demise, or at least speeding it up.

Market watchers have been delivering the message that platforms are a scale business now, and one can imagine that withdrawals from significant investors in succession could have a real impact on assets under management.

A Transact spokeswoman says that the business does not expect advisers to see any change in proposition or service.

Advisers cash in

In the meantime, platform insiders look set to cash in. AJ Bell founder Andy Bell, who holds a 28 per cent stake in the business, could see his personal estimated wealth of £165m soar another £90m if the company were to float at a conservative valuation of £300m.

Also set to benefit from the potential listing would be top shareholders Invesco Perpetual and Woodford Investment Management, which have stakes of 37 per cent and 8 per cent in the business respectively. Integrafin chairman Michael Howard had a potential windfall of £38.8m on Transact’s float.

FCA statement

“We would expect firms to identify, record and manage conflicts of interest in accordance with our Principles for Businesses. Principle 8 states that a firm must manage any conflicts of interest fairly. Where we have identified concerns over a firm’s management of its conflicts of interest the firm will be subject to our normal supervisory processes.”
An FCA spokeswoman

It’s not just platform bosses who will earn decent money from IPOs: some advice firms have also become very heavily invested in the platforms themselves. While some platforms have cut back equity incentives in the wake of the RDR, many financial planners and their firms are still sitting on historic stakes.

Dorset IFA Atkins Bland managing director Kevin Bland planned to sell around a quarter of his 2.4 million shares under the Transact listing, according to Intagrafin’s prospectus, which would have net him just under £1.2m. Cheshire’s Greystone Financial Services was also looking at a £4m windfall ahead of the float.

Transact, like other platforms, gave IFAs the chance to snap up share options years ago under an early adoption incentive scheme. Argyle Financial Planning director Phil Melville bought 4,000 shares in the business back in 2002.

He expects demand for the shares to be high. He tells Money Marketing: “We will be keeping hold of the shares and I expect a lot of other people will, too.

“They pay a good dividend and it’s a very profitable company with predictable cashflow – businesses like this are a gold mine for investors. I wouldn’t be surprised if the share price doubles when they start trading.”

Conflict of interest concerns

But there are concerns about the conflict of interest that adviser stakes in platforms could represent. A poll by Money Marketing reveals some 75 per cent of readers believe adviser equity stakes in platforms are a conflict of interest; 22 per cent disagree and 4 per cent are unsure.

When the likes of AJ Bell, Transact and Nucleus form part of the main market, they are not only a part of an index purchased through a tracker, but are open to direct equity investment from advisers, allowing them to take renewed stakes after initial equity incentive plans closed.

This could arguably sway advisers towards putting their clients on a listed platform, not to mention the FCA’s current review into competition in the platform space and whether some players will use their listed position to exert influence over small players.

To a lesser extent, these issues will also face support service providers such as SimplyBiz, as the firm is reportedly also mulling a listing.

Lang Cat principal Mark Polson says: “Transact and Nucleus have always had this structure where advisers have an equity stake. It is a conflict of interest, there’s no sugar coating that, and advisers need to disclose that to clients and then manage it appropriately.”

A senior compliance source agreed that there would “always be a conflict of interest” when advisers had equity stakes in platforms, even if the RDR had put to bed some of the more obvious inducements to business on offer.

Nucleus, which at one point was 51 per cent adviser-owned, began requiring advisers to invest in the business in order to use its services with the intention that this would align the cultures and interests of the advisers, clients and platform.

Nucleus chief customer officer Barry Neilson says: “Even if Nucleus were to float I don’t think it would be an issue. Advisers are heavily regulated and they put their clients first. We have never seen an instance where we felt an adviser’s behaviour was being influenced by their shareholding.

“We fully acknowledge it creates a potential conflict of interest but, as long as advisers disclose that to clients, it can be managed.”

The potential conflicts are something that concerned Chapters Financial chartered financial planner Keith Churchouse when he was offered shares in Nucleus. He decided not to take the options.

He says: “I always felt there could be an issue around owning shares in a platform and then recommending its plans. It could be viewed as a conflict of interest and we just wanted to be as transparent as possible.”

Melville disagrees, however, arguing that the conflict is no different from investments in any listed fund manager held in an adviser’s own portfolio.

He says: “It’s no different to me owning shares in Standard Life Smaller Companies and then recommending that fund because I think it’s suitable for a client. We use Transact because it does what we need it to do.”

A leading compliance expert tells Money Marketing that the best way to prove there is no conflict for an adviser is to demonstrate clearly in their suitability report that they would have used the platform irrespective of their shareholding – but adds that ownership and financial strength of a platform are still relevant factors in platform due diligence so should be reviewed regularly.

One adviser using the Nucleus platform and who was an original shareholder places their stake in the company into a separate pot to be shared with clients. The adviser says Nucleus was “encouraging” about such moves as a way to mitigate any perceived conflict of interest.

Polson adds: “Anything can be a conflict of interest if you look hard enough, but any adviser who is professional won’t be swayed by a shareholding.”

While some commentators expect Transact to be the first in a string of stock market listings, Seath thinks there is more likely to be consolidation within the industry.

She says: “Platforms with less than £5bn or even £10bn under administration are just too small.

“We could see fund groups buying into this sector, looking for greater distribution influence and potentially a way to administer their
legacy books. We’ll have to watch this space.”

Expert View – Malcolm Kerr

Platform IPOs are better than provider control

With Nucleus they were very clear that early adopters would get equity. It was a significant number, but I think they had conversations with the FCA on
the point of whether it would be a conflict.

The issue was that the FCA would be very concerned if the equity was in any way reflected in an amount of business you were actually putting on the platform. Nucleus handled that quite openly, and Transact have a lot of investors who aren’t IFAs.

If you look at Transact, they’ve been reducing their prices over the years as the platform gets larger and larger, and there will be an understanding with investors that it is going to keep coming down and they are making money from it. It’s unlikely that people would use a platform for 10 years, or even longer with Transact, because of equity, so I don’t think it’s a big issue from a conflicts standpoint.

What could happen and would be good is that Nucleus and Transact stay pure play platforms; they don’t actually have their own funds on them. The likes of Standard Life and Fidelity are generating margins both on fees
and the funds clients are investing in. I think it’s good those guys are going for IPOs and they haven’t got a provider – be it a life company or fund manager – purchasing them so they don’t have a reason to try to encourage people to invest in their own funds.

Malcolm Kerr is senior adviser at EY

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. “We fully acknowledge it creates a potential conflict of interest but, as long as advisers disclose that to clients, it can be managed.”

    Disclosure seems to be a common theme from others too. It is rather interesting then that no one, including MM, has mentioned the new requirements under MiFID II which make this view rather curious. And before non-MiFID firms turn away, SYSC 10 appears to extend the requirements to them as well.

    So what does MiFID II say (see also SYSC 10)? It’s quite long but a couple of snippets might help illustrate what’s required and set the tone.

    Firms must “take all appropriate steps to identify and to prevent or manage conflicts of interest between themselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof, including those caused by the receipt of inducements from third parties or by the investment firm’s own remuneration and other incentive structures”.

    “Investment firms shall ensure that disclosure to clients, pursuant to Article 23(2) of MiFID II, is a measure of last resort that can be used only where the effective organisational and administrative arrangements established by the investment firm to prevent or manage its conflicts of interest in accordance with Article 23 of MiFID II are not sufficient to ensure, with reasonable confidence, that the risks of damage to the interests of the client will be prevented.”

    There’s a Catch-22 here. You only need to disclose to clients if you can’t effectively manage out the conflict. If you don’t disclose then that’s a tough thing to prove to a regulator. If you do disclose to the client then you’re effectively admitting you can’t and have to explain why (and that can’t be a generic statement).

    Whilst the article covers things from an adviser firm perspective, what are platforms doing with these new rules?

    History suggests that the regulator doesn’t want to open this door too wide for fear of a Pandora’s Box, but at some point that might change…

  2. The flotation of Transact does not in anyway increase any potential conflict of interest which has always been there, if anything it reduces it. A shareholding IFA is also always going to have more information about the business than standard due diligence and now Stock Exchange rules on accounting, auditing and transparency of business forecasts give a further layer of comfort.

    • I should have added that with a business the size of Transact the addition of one, ten or even a hundred clients from an adviser is not going to make any material difference to the value of the business.

  3. Well done to Malcolm for pointing out that Transact reintroduced real mutuality into the market by reducing charges for all clients, existing and legacy. This is so very different to the standard practice of the then dominent life companies, forever beguiling the market with new and better and sometimes cheaper plans, leaving behind a complicated legacy plan mess. I understand that the Prudential, by comparison, has 39 different series of Personal Pension Plans alone, each with a different charging structure!

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