For some years, experts have been forecasting a reduction in the number of platforms operating in the UK, yet the numbers continue to increase. Why have they been proved so wrong?
The reasons are relatively straightforward:
• All business is or will be written on platform, in one form or another. Thus, no platform strategy means no strategy, and that means failure. At the same time, distributors see the attraction of becoming their own platform managers and thus new platforms are continuing to come to market. Examples are Fusion, the award-winning platform from the people behind IFA network Best Practice, and Aon, which acquired the platform of Lorica Employee Benefits.
• All platforms that could exit with relative ease have done so – American Express, Abbey, Macquarie, Norwich Union (first time around). These were rich companies that could afford exit costs and to whom a platform did not appear critical – at the time. The smaller platforms, such as Nucleus, Ascentric and Novia could not afford failure. They had to survive and become profitable – and they have.
• Most markets achieve efficiencies by merger and acquisitions. The fund business in the UK is a large cottage industry, sadly inefficient due to low entry barriers, high margins and low adoption of technology. An outcome of this is the impossibility of swift, cheap reregistration of funds from one platform to another. The internal switching cost is about £40 per customer. The IFA cost is anything from £250 to in excess of £600 per client. It may well take legislation rather than regulation to change this.
The changes in the platform world will most likely not be because of normal business economics, but because they will arise from changes in regulation and legislation – unintended consequences.
The 2014 Budget pension changes will change the industry. We know not how just yet. The retail distribution review will also result in dramatic, unintended, change, the shape of which is now becoming clear.
It was apparent when the new regulation was published that the cost of independence would be too high and that nationals and networks would struggle, especially with no provider income streams in the form of rebates, bungs or bribes.
What was less clear was the impact that unbundling would create. Change was not in a straight line, it went thus:
• Big platforms lost their rebates from asset managers that were rewards for scale advantage.
• To maintain an edge, platforms demanded new cheaper fund share prices from asset managers – so-called extra-clean classes.
• Yet these would benefit customers, not the platform profitability, except that ...
• They could reduce the total cost to the customer, possibly compensating for higher costs elsewhere.
Asset managers did not play ball. Better share prices would only be warranted by volume deals. Platforms, per se, cannot promise volume. However, those with assets in the group can.
IFAs, of course, cannot be a party to volume deals. They cannot guarantee where tomorrow’s flows will go. A restricted firm can. This will change the competitive dynamic.
