What level of assets does it take to run a profitable platform? Even Cofunds, the UK’s biggest platform, would be hard pressed to come up with a concrete answer.
As at 31 December 2015 (the latest full-year data available), Cofunds had sizeable assets under administration of £76.9bn. And yet in the same year, the platform saw its profits tank from £7.7m in 2014 to just £73,000 in 2015.
Cofunds is by no means the only platform to be in this situation, but it just goes to show that “going for scale” does not a profitable platform make.
It is a difficult business running a platform, and even more of a challenge to do so profitably. For advisers, their businesses and their ability to serve clients is inextricably linked to the long-term future of a handful of platforms. This is why the Aegon/Cofunds deal and Standard Life’s acquisition of Elevate were such big news, and why platform sustainability plays such a key role when it comes to due diligence.
For platform providers, outwardly they preach the same service-driven values as advisers. That may be true, but in some cases there are other ulterior motives at play. Some providers run platforms as a loss leader, and see them as a means of distribution to drive flows into discretionary services and/or in-house funds.
Other platforms are simply, perhaps desperately, trying to rein in ballooning costs.
There is a delicate balance to be struck between attracting high volumes of assets (and securing the discounted deals that go with that), and investing in technology in order to service that rising number of clients appropriately.
The numbers floating around in a bid to resolve this dilemma are not to be sniffed at. Aegon has bought Cofunds for £140m, plus will have to fork out another £80m to integrate the two businesses. Standard Life is rumoured to have paid a £40m price tag for Elevate. And that is before we get to replatforming costs, and Old Mutual Wealth’s eye-watering £450m cost of upgrading its platform.
Given the sums involved, the jury is out on whether more mega-deals are in the pipeline. Some platforms are eyeing a different route altogether, such as Transact and its planned IPO.
As the pursuit of platform profitability continues, and talk of consolidation gathers apace, advisers will be hoping their chosen platforms are the ones left standing when the music stops.
Natalie Holt is editor of Money Marketing