AT8 have increasingly been looking at overseas practices to see what lessons can be learnt in the financial services market.

One clear market we can learn from is Australia.  The Australian market is in many ways more advanced than ours.  They have had superannuation for a number of years, forcing the general population to invest for retirement.  This had led to substantial assets under management so it is not a surprise that platforms and wrap solutions came to market there before the UK. Many of the technology companies that drive the platforms in Australia have now brought their technology to the UK and are underpinning the UK platforms.  FNZ for example now powers Elevate and Standard Life’s Wraps while GBST (formally Infocomp) powers Macquarie and Novia.

In our work in the UK we have spent considerable time looking at how the Platforms should integrate to the Practice management systems in the UK.  One Australian Professional, now operating in the UK, told me that it was the Practice Management Systems with a focus on the Front Office, providing ATR, Cashflow Planning tools, Asset Allocation tools that had thrived in Australia ‘Post Wrap’ while those focused on more traditional Back office functions like contract enquiry and commission reconciliation have suffered.

Another trend we picked up from a systems house in Australia and that perhaps we can learn from, is that the Wraps have largely been through the phase of trying to provide the whole suite of IT tools to the distributor and  moved back to their core business of fund administration.  The CRM and Sales tools moving very much off platform and back to the practice management systems.
Our focus hasn’t just been on Australia.  We have been taking a look at Financial Planning tools in Northern Europe.  In particular we have looked at Ortec who provide portfolio creation and monitoring software, using complex financial models to help match asset allocation to ATR and to review whether the investment strategies stay in line with the client’s goals.  Their approach appears differentiated to the UK systems and if anyone would like more information then we would be happy to provide an introduction.

We mustn’t forget the US.  A few of the leading US financial planning tools have been anglicised and are now operating in the UK.  Planlabs has been available in the UK through BMC for a while now and last year Voyant launched in the UK and is gaining good market traction already.  Voyant has a Web 2.0 approach with a strong Business to Consumer function that can work in collaboration with the IFA solution.
Looking overseas of course isn’t an exact science, their market drivers are different and systems will evolve with different prioritises, but it can give us a useful insight into some of the trends that may occur in the UK in the near future and besides that it is fascinating and fun.

The Platform market is in an interesting and potentially challenging place to be at the moment. As we have said in the past, there has been strong growth in the number of Operators and in the ‘Assets under Administration’ (AUA) on Platforms. The number of Platforms is currently circa 20 with several more in the pipeline and some people still considering whether they should enter the market. The AUA is over £100 billion having grown by some 46% over the last year and expected AUA of over £300 billion by 2012.

With adviser interest in making Platforms part of their business models, it would seem that there is a good commercial case for Platforms. Indeed, it is likely that firms will need to consider not just whether they do adopt a Platform strategy but why they wouldn’t. The FSA Discussion Paper 10/2 has added to the debate with a range of questions about the due diligence, ongoing management, segmentation and customer solution matching along with remuneration methods and transparency as well as best execution.

We have looked at a number of Platforms and written articles as part of our weekly PA column. We have also looked at a recent initiative by Capita that has seen the launch of the Synaptic [Platform] Comparator. There has been some debate about whether it is possible (or right) for a firm to choose a single Platform. The FSA paper said that although they do not expect firms to review the platform market for each client, they do expect firms to consider which platform(s) are appropriate for their client bank – or segments of their client bank – in general terms and then ensure the recommendation is suitable for individual clients…

Different parties have chosen to interpret the FSA statement in different ways. Clearly, there is further debate and lobbying to take place on what is and isn’t acceptable. The Consultation Paper was expected midyear but this has now slipped to Q3 – perhaps giving an indication that there are still some challenges to be resolved in the mind of the regulator. We have written a Paper on the subject of Platforms – available here…. In addition, we have reviewed the Synaptic Comparator product that has now been launched and the article will be published in Professional Adviser in a few weeks. One of the striking issues that Comparator raised was the big, maybe surprising, perhaps even shocking differences in the potential customer outcomes. Platforms do not have simple, consistently clear and transparent charges! Trying to understand the implications of the charges and to compare how these affect customers’ choices is a good thing (some may not agree). If you use a measure such as ‘reduction in yield’ (RIY), or total expense ratios (TER) it is possible to see the ’drag’ of charges on an investment and this can vary significantly between first and second choice as well as the best and worst – hundreds, thousands and tens of thousands of pounds!

By fragmenting the issue of choice, some may see comparison tools as undermining the modus operandi of Platforms as being a single economic asset management solution. However, the differences cannot be ignored and the industry is likely to close some of the gaps through competitive pressure and in time is also likely to consolidate Platform choice through M&A. We believe it is better that the industry sees and addresses the differences of choice and value early as we do not want to see another potential mis-selling scandal that hurts everyone.

Advisers need to look at Platforms to assess whether they are right for their business and for their clients. They should rule in or out of having a Platform strategy with a conscious justification that is reviewed regularly and tested against segments and individual needs. The issue of choice remains, not only at outset (even if a single Platform strategy can be justified when challenged) but also through ongoing reviews for how assessments are carried out and with what frequency – periodic or on each customer transaction.

As for Platform Operators (current and potential), the question of their own business case must be robustly assessed as there is a current trend to reduce costs that could reduce or remove margins. However, there is also a question about whether some Providers can decide not to become Operators if they are to remain viable businesses in the future.

Although I have no direct evidence to support this feeling, I sense that the past interest and motivation of IFAs to move towards using Wraps has become less certain in recent months. There is no doubt that the number of Wrap providers in the UK has increased in response to past demand expectations and this has given advisers a wider choice, but most Platforms are still loss making and still have some way to go to extend the range of funds and services expected of them by the IFA community.

We are still waiting for the FSA to publish the results and conclusions from the Thematic review into the use of Platforms. However, with what has been written so far, there is likely to be a need for significant investment in extending the platform capability to ensure that they cover the whole market . The concern about whether one Platform can provide comprehensive and fair analysis of the market has already been expressed in CP09/18. As things stand, it would be difficult to see a single Platform meeting the expectations of the FSA. Indeed, the question may be what number and combination of choices would give this degree of coverage and how would and IFA manage such a combination to deliver the right customer outcome in a cost effective way. There would also be the challenge of how integration between any such combination and other Practice management technologies may work.

With RDR, the Provider backed Platforms will have to ensure and show that there is separation of influence between the use of the Platform and the sales of their products. As a result, the original motivation for the multi-million pounds of investment may be more difficult to justify – especially if the bigger investment and development is to expand the range of funds and investment vehicles, so diluting their own business volumes.

Some of the motivation of IFAs towards the use of Wrap has been to move their business models towards a fee – FUM – rather than commission basis. However, there remains some question over the ‘transparency’ of charging on Platforms, both for Advisers and for the Fund managers. Transparency will need to address ‘disclosure’ (clarity) objectives and also ensure that there is no Product Provider influence over remuneration – hence potentially reinforcing the need to separate the Product Provider and the Platform Provider relationship. One of the benefits of Wrap is that they typically require and show that there is an ongoing servicing relationship and this can help with fee justification. However, the FSA has already said the move of customers to Wrap alone should not be used as a means of increasing the costs to the end customer.

Some of the Platform providers have sought to incorporate a range of tools and services into the Platform. Some even had aspirations that their Platform would be a source of all an IFAs needs. But many of these tools potentially duplicate those tools that are available via Financial Planning, POS and Back-office providers. These cost money to provide and as we move forward, the need and justification for this investment will become challenged, especially in relation to the potentially stronger pressure to invest in ensuring they have wider market coverage.

The pressure to invest in wider coverage when Platforms are still loss making and facing greater competition is going to be a difficult balance. The Providers will be losing the ‘cross subsidisation’ argument for internal funding and some of the ‘Independent’ platforms may struggle to raise the investment capital. Ultimately, this may result in cross platform collaboration and/or M&A activity to effect consolidation. In the meantime, we await the publication of the FSA review and any proposed changes to how Platforms are to be regulated.