At present, there are over 30 platforms operating in the UK adviser market with over £225bn under administration. With the retail distribution review now implemented and the FSA’s (now FCA) platform reform paper CP12/12 close to finalisation, what does the future hold for the UK platform industry?
Over recent years platforms have significantly improved their efficiency, functionality and usability. This has led to increased popularity in the adviser market as firms have turned to platforms for full administration services instead of retaining their own unwieldy and potentially risky administration services.
In addition, the buying power platforms have developed with fund managers and the more recent addition of stocks and shares as investable assets have also proved to be useful selling points to the adviser market.
The popularity of platforms is unlikely to recede and will probably increase at a greater pace than before, for a few reasons. One rationale for extended growth is the squeeze on adviser margins that is predicted in the wake of the RDR’s drive for greater transparency.
As advisers introduce explicit charging and move to an unbundled proposition, their revenue generation may well be squeezed and many advisers will be forced to review their business model.
Advisers will need to ensure that they are commercially lean and that their core services (financial advice and planning) can continue to be provided at a profit. This will no doubt draw immediate attention to non-fee generating areas such as administration and software that could be replaced by a platform. This option offers a cost-effective solution as well as additional functionality and services.
Some industry experts predict that this will create greater definition between advice (provided by the adviser), and execution (completed by the client themselves). This again is likely to generate new semi-direct platform business.
With this newly created transparency comes a model that does not necessarily allow for larger clients to unknowingly supplement smaller clients. The explicit charging will most likely prevent advisers offering their full advice and implementation service to clients with assets under £250,000 and potentially no service at all to those with less than £50,000. This is likely to create ‘orphan’ clients. This new market segment is likely to generate consumers who will also turn to platforms as an easy way to manage their investments themselves.
In June 2012, the FSA published consultation paper CP12/12, which confirmed its plans to implement a ban on all commissions paid by product providers to platforms on advised and non-advised business, along with the ban of all cash rebates paid by product providers directly to consumers.
The theoretical rationale behind the CP12/12 is to clarify the role of the platform and extend transparency with respect to the cost of investing for the end consumer, whether advised or non-advised. In the same way that the RDR has resulted in the need for wholesale changes to many advisers’ business models, this is likely to have the same result for most if not all platform providers.
In reality, some platforms could be forced to operate two separate business models, or even three in the short term.
