Platform Consolidation

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It’s been widely mooted for the past decade but the time is nigh for the start of a prolonged period of consolidation in the UK investment platforms market.

There are currently over 30 platforms in the UK and, arguably, the end game would result in a high single digit number of them surviving.

Platform markets overseas act as strong indicators that there is no hiding from consolidation and this will eventually happen. The US has around 10 platforms servicing a 300m plus population while Australia also has a considerably smaller number of mainstream platform providers.

Consolidation in the US was a result of consumer economics, while in Australia it was driven by compulsory superannuation. The Retail Distribution Review (RDR) was supposed to be the catalyst for consolidation in the UK, although market volatility, coupled with increasing demands on the technology side of the business is also set to play a role in stimulating mergers and acquisitions in the platform arena.

In the past 18 months 7IM, Parmenion and Axa Elevate have all been acquired by suitors, however, given only Axa Elevate has been purchased by a competitor, Standard Life, could there still be scope for further entrants?

You need look no further than Cofunds to realise some platforms are creaking from the cost burdens placed on them simply to stay up to speed with their peers.

Cofunds was acquired by L&G in 2013, however it appears the insurer was not 100% certain of its acquisition and has been looking to flog the firm to the highest bidder for the past 18 months.

The pressures of regulation continue to impact the platform market as wraps continue to benefit over fund supermarkets. The latter have traditionally positioned themselves as an offering aimed at the low value investor, while wraps are considered specialists, offering additional services on top of investment options.

Fund supermarkets, having traditionally built their model around being free, while taking a cut from unbundled charges – something which they can no longer do thanks to RDR – are now looking to add a raft of additional services to catch-up with wraps.

The RDR itself continues to impact the platform market in many ways – in 2014 larger platforms saw their business models come under more pressure as their competitive pricing advantage was taken away following the cash rebate ban.

The next landmark came on April 6, 2016 when all trail commission was switched off for platforms and corporate pensions. The stress of this change on each adviser business varied widely according to the size of a firm and the capacity it had to move to a totally fee-based model as well as those firms who simply have been around for a longer period and have a business that was heavily centred on trail commission.

The move to a fee-based model means simply having a list of funds to choose from is no longer enough for a service many advisers are using daily for a majority of their clients. Wrappers and add-ons like tax calculators are no longer privileges, but amenities for many advisers when they seek out the best platform for them.

Fund supermarkets, in particular, now have to bring their systems up to date to cope with these changes.

With regulatory change putting further pressure on advisers’ day-to-day business operations, many in the industry believe the winners and losers in the platform space, at least in the short term, will be determined by niche offerings or services. That being said, with back office systems becoming cheaper and easier to access, the barriers to entry are still low enough that new players could, and still do, come into the market.

Ultimately price will remain the critical factor and the leaders in the platform world will be those who can be flexible while running a profitable business.

Whether we have reached a consolidation stage, or we are simply seeing attrition in the platform market remains to be seen.

The doubters of consolidation would say the cost of re-registering assets is simply too high and that consolidating without a guarantee of improving costs makes no sense at all, particularly given all the legislative and regulatory hoops you have to get through.

What we have seen is platforms being sold to new entrants with bigger pockets to make it work. There are significant challenges aligned with acquiring a platform, such as aligning systems, propositions, sales and marketing. Ultimately it will cost millions and will be a number of years before it becomes cost effective. There is also a worry that advisers, who form part of the acquired firm’s client book, may not welcome the changes and vote with their feet to one of the many alternatives platforms in the market.

Technological improvements may become the key to further consolidation as updated systems make platform integration faster and simpler.

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