Assets Under Administration (AUA) are growing at a rapid rate. The adviser platform industry grew by an average of 23 per cent in 2012, according to Fundscape, increasing assets by £40bn to £214bn.

The managing director of Fundscape recently predicted that “total platform assets doubling to £428bn by 2017 is a realistic scenario”. Others have predicted that total platform assets may reach as high as £600bn in the next five years.

A significant proportion of this growth will be due to the RDR. Ninety-three per cent of IFAs are now using a platform to facilitate the payment of advice fees, according to unbiased.co.uk. Almost every life company, distributor, wealth manager and adviser service company is either considering, building, implementing or enhancing a platform-based proposition.

In this post-RDR world, the three key success factors for all of these businesses will be: recurring revenues, building assets under advice/ administration and the ability to easily take fees from clients. A platform enables all three.

Platform margins are under significant pressure due to increased competition from other platforms and other parts of the value chain. Platform costs are rising in line with revenues, often due to an over-reliance on manual, paper-based processes and inflexible technology. When combined with reducing margins, this means that many platforms are finding it difficult to make a profit.

Recent research from Altus Consulting concluded that while total revenues among platform providers have more than doubled since 2006, costs have also increased at the same rate and, as a whole, the industry still makes an operating loss.

Some of the larger “fund supermarkets” are barely making a profit, even with roughly £40bn plus of AUA.

To benefit from the rapidly growing market, the platform industry needs a solution to reduce operating costs, increase flexibility and decrease time-to-market.

Most research houses tend to focus on adviser platforms, which is the sector experiencing ever-increasing operating costs and dramatically reducing margins due to the five-fold challenges of:

• Intense competition for advisers from an ever-growing number of adviser platform providers.

• Growing competition for margin from other parts of the value chain (fund managers, large distributors, and so on).

• The costs and uncertainties involved with complying with FSA regulations.

• Previous generation technologies and inefficient operations.

• Larger (and particularly restricted) advice networks seeking white-label propositions, further compressing margins.

The other four platform business models – institutional, corporate, utility and direct to consumer – started life as low-margin, low-cost businesses. The adviser platform providers did not; they started out with higher-margins and people-and-paper-centric operations.

Many adviser platforms will have to radically re-engineer their business models if they are to survive, let alone thrive. Many understand this and have initiatives in varying stages of progress. Others recognise the need to change, but find it difficult as it involves an overhaul of their end-to-end business processes.

The landscape of the market should change dramatically in the next few years. During 2012, the market leading adviser platforms continued to lose market share to existing wraps, self-invested personal pension (Sipp) platforms and newer entrants – put down to a combination of functionality, usability, service and a commercial model that requires significant change post-RDR.

Their market share will likely erode further once Tisa’s TeX solution comes into force, making it easier for advisers to re-register their clients’ assets on to another platform.

Will the platform market consolidate? At the adviser level, no. Every wealth manager and network will have their own platform or platforms. So from the investor’s perspective, the number of branded platforms will increase exponentially.

The platform businesses that survive these next few years will have clear propositions aimed at specific customer segments, plus they will possess:

a) sticky customers (advisers who are bound tightly to the business or customers attracted to a strong brand), or

b) deep pockets as they re-engineer their operating processes and migrate their clients to new ways of working.

Future market leaders will possess both.

Campbell Macpherson is managing director at Campbell Macpherson & Associates