Will investment platforms be disrupted by entrants if they do not get ahead of evolving customer demand and regulatory changes?
The market as it stands has somewhere between 20 and 30 platforms, but a lot of them do different things and have different business strategies.
At one end of the scale, you have the likes of Transact, Nucleus and James Hay Partnership. These platforms are typically more independent and are unlikely to put any influence on the funds the advisers invest in.
At the other end of the scale you have the larger vertically-integrated business, such as Standard Life Wrap, Old Mutual Wealth and St James’s Place (SJP). These are often part of a wider asset management business. Additionally, the platforms are an enabler to get flows into their own funds.
On the direct to consumer (D2C) platform side are Hargreaves Lansdown and Nutmeg.
But all models are facing disruption in their own respective markets, due to regulation and customer demand.
In the adviser platforms market, we find entrants such as Hubwise and Embark are looking to shake up the sector and take market share, Mike Barrett, consulting director at the lang cat has said.
Mr Barrett commented: “If you asked me six months ago I would have said no, there were no new entrants. But in the last couple of months, we have seen Hubwise and Embark. Both of them are coming in with simpler, stripped down propositions. And they have none of the legacy or bells and whistles a lot of the platforms have attached to them.”
As platforms have grown, a lot of them have expanded their proposition, to include online reporting tools and risk profiling tools. But advisers have moved on from those types of technology; preferring to use the tools offered by more independent sources than the providers.
Mr Barrett said: “Hubwise and Embark don’t have that. They are much cheaper and their technology is much more modern.”
The challenges facing the larger platforms could also make it easier for customers to be drawn to the entrants, according to Kevin Okell, consultancy director from Altus.
In principle, platforms allow retail investors to pool their money and achieve better investment returns. The idea is that clients can get their assets serviced and valued in one place.
But Mr Barrett said platforms on the whole are not delivering on that promise.
He said: “Back offices need to be doing more. That’s where you can give a client a full holistic view of their financial position.”
Recently published research from CoreData, which spoke to 1,000 advisers, found that a third of respondents, 33.7 per cent, cited annuities and income drawdown as the products they most want to see on platforms.
Mr Barrett added: “It’s not just investments; it’s property, shares, annuity income, cash. Platforms have not worked well enough on that reporting.”
Mr Okell said: “I would quite like to have all my finances in one place, not just assets. If you could get that all joined up that would be great for customers. People who sell the products make the money, but eventually power will move to the customer.”
On the D2C side, platforms are also facing a sea change.
Hargreaves Lansdown is the largest D2C platform with £70bn of assets under administration or management. As part of its offering, the company provides a mobile app that helps clients trade and manage their investments.
- All platform models are facing disruption in their own respective markets
- Robo-advisory platforms will be able to pull information from banks to manage financial transactions for customers
- The biggest disruption that all platforms face will come from regulation
But it, too, is facing competition.
The revised payment service directive (PSD2) gets implemented next year, making it easier for companies to get hold of banks’ transactional data. Robo-advisory platforms will be able to pull information from banks to manage financial transactions for customers.
Similarly, banks themselves are getting in on the robo-advice platforms act as well, because of the opportunities they can capitalise on with their existing client base.
Mr Barrett said: “The evolution we will see in 12 months is banks coming into this space. Most of the banks at the moment have quietly got a basic execution only non-advised platform. Santander has said publicly it is developing a robo-advice service. Barclays, HSBC and Lloyds are doing the same. When those services come in, it will be a big moment for the direct market.
“Santander has the biggest market share in terms of current users for its 123 Account and you could suddenly be getting robo-advice next to your 123 Account once you log in and they can market and cross-sell across all that.”
Mr Okell said: “On the fund manager front we’ve seen Vanguard go live and M&G were due to but have been delayed. The threat they represent is indeed their existing client bases – millions of current account customers who would probably prefer to see the rest of their finances all in one place.”
Another big challenge on the direct side is customer acquisition – trying to get new customers to come in and invest. It is a costly exercise.
The biggest disruption all platforms face will come from regulation. Existing businesses are finding it tough to enhance their systems when compliance with regulatory changes must take precedence. For example, the Markets in Financial Instruments Directive and Regulation package (MiFID II) is coming into force next January.
No matter how difficult a project, it will have to be delivered by the date set by the regulator or the company will have to stop trading.
All this change is coming at a time when the FCA has also published its probe into platforms.
The review has been sparked by the pace of growth in the platform market, causing the FCA to want to ensure it is working in the best interests of investors. The review will look at barriers to entry and expansion, commercial relationships, the impact of advisers and customer preferences, behaviour and business models and platform profitability.
Talking about platform profitability, Mr Okell said: “There are different share classes. It is difficult to compare one platform with another.”
Amid all these change, how will direct and adviser platforms fare?
The direct platforms are facing more rapid change, but for adviser platforms, time is a bit more on their side.
Mr Barrett said: “The pace of change is a bit more glacial. It is more difficult for some to disrupt the [adviser platform] market, because advisers are going to be more wary about trusting their clients’ money with a new entrant.
“The challenge will be to get advisers to actually adopt it and to start using them for a significant amount of their assets.”
Published 20 September 2017