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.

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.

For the many Providers, in an increasingly global market, they would probably like to exploit synergies in product manufacturing and operations. Whether they could design a set of product ‘chassis’ may be debatable but parochial regional interests can get in the way even if it were possible. Many see the aspiration of a common, consistent technology infrastructure as a ‘pipe dream’ but Providers are going to have to re-examine what is possible and acceptable. Developing, maintaining and servicing products on legacy technology is expensive and time consuming. To compete in the future speed to market is going to be critical, as is the ability to adapt to the different needs of consumers along with the capability to change products and services based on customer feedback, along with emerging trends and opportunities.

In the past, many products have been too complex and so taken more development effort, time, money and ongoing service than was necessary for many of the customers. However, with little or no ‘experiential’ data or feedback, providers continued in blissful ignorance. Indeed, it could be argued (as the FSA would do so) that Providers used commission to ensure that they achieved sales of poor products. Many IT systems are a constraint to innovation and speed to market and whilst there is always a concern about what technology alternative to choose, a failure to act and not do so with knowledge and speed, is a certain recipe for future failure. Providers have wanted to ‘own’ their IT operations and so many have IT departments that are bigger than technology companies. Some have ‘outsourced’ their operations, but this is disguising rather than solving the problem. The world has moved on and more and more businesses are looking to adopt a SaaS strategy.

With the effect changing remuneration from ‘Provider determined’ commission payment outlined in the RDR, Providers are going to have to look very hard at the operational costs of their business. Products will have to be price and feature competitive, as well as being able to offer a quality service. How they choose to distribute products will also be a key issue. There is real a danger that the ‘commoditisation’ of products could leave many unable to compete in an Adviser (IFA) only route. Do they aim to be in a niche and if so which one? Do they operate a tied/multi-tied model or work on a ‘direct to consumer’ model. Each of these has different product, remuneration servicing implications. There is little doubt that the next few years will see some significant consolidation and it is likely to the strategically strong innovators that survive.

When looking at the analogy of car manufacturing, do Providers aim to have an entry level model such as the Tata Nano for one market segment and separate ‘luxury’ marque such as the Jaguar for the better off? Taking this analogy back to how Ford created their product development and we could see an underlying chassis and certain ‘parts’ such as on the Mondeo being used with the jaguar X-Type brand. Common architecture and component re-use should be sought and exploited where possible. A ‘Wrap’ or ‘offset’ concept may also be worth exploring; it may be a degree of ‘snob value’ but if all those who say they are going to concentrate on the ‘Wealth Management’ space, it will be very crowded and very competitive! The mass market can still be served profitably, it will require a different approach to product development and distribution. A simple, low cost product that can be easily understood and bought, may not meet the ‘ideal’ of some untopians (including FSA personnel), but if it is possible to ‘upgrade’ or ‘trade-up’ – perhaps with advice, the objective of getting from A to B may well be better served by a ‘Tata Nano’ than not getting from A to B at all.

In next week’s final instalment, I shall wrap-up with some distributor views.

Announced at the recent CES event in Las Vegas by Steve Ballmer, Microsoft’s CEO , Windows 7 is the replacement for the much maligned Windows Vista. It’s come around faster than previous Windows upgrades – only three years in development, where the norm is around four. For those in the development community, Windows 7 beta has has been around for a few months, but the general public was given the chance to download from the 9th January.

The release had a bumpy ride, with Microsoft servers being overwhelmed, but from about mid-Saturday the download was re-instated. So, I decided to give it a go – after all, it couldn’t be any worse than my experiences with Vista Business Edition (too many to go into here!).

It took about 1 hour and a few restarts – but it works; and for a beta release it works incredibly well.

I love its speed and the new taskbar, where you can pin your favourite applications but also jump straight to opened documents and also pin favourites, too. I’ve not found any application that doesn’t run apart from needing a little tweak to Google’s Chrome browser.

So, in my limited example, it looks like Microsoft have a winner here – the next job will be to attempt to persuade those who have paid for Vista to upgrade again and to undo the negative press around the Vista story.

Let’s see how it goes.

There is a lot of noise and media coverage about Wrap and the future impact it will have on the provision of financial products along with the associated advice and service. What is a Wrap anyway? There are probably as many different answers as there are opinions of what Advisers should do!

Well here’s my view… Wrap is (or should be) a ‘holistic, up to date and comprehensive view along with an ability to actively manage a client’s entire personal wealth – a personal [family] balance sheet and P&L statement with future forecasting and planning scenarios reviewed, refined and actioned regularly’. Like the role of a company Finance Director, this information about the individual [and family] is essential for an Adviser to be able to develop the strategy that supports the individual’s life- plan, to then monitor and manage performance to agreed objectives as well as deal with the inevitable unforeseen events and crisis along the way.

How does this differ from the current view of service offered by many professional intermediaries? Well, the answer is that it may not be that different; only the adviser – and client – could answer that question honestly. However, for the avoidance of doubt, it does not necessarily just mean a summary of your current Life & Pensions, Savings & Investments products. The scope of coverage is potentially huge and this is where the complexity of gathering, reporting, analysing and advising comes in. It is also why an effective Wrap needs to use a properly designed technology platform.

Typical scope would include the obvious candidates:
• Pension [types, sources, benefits and tax treatment?…]
• Protection [Term, Whole Life, Critical illness, PHI, PMI, DIS, FIB, DTA, Endowment…]
• Savings & Investments [NS&I, Endowment, Unit linked, BS, Bank, PEPs, ISAS, Unit Trusts, Investment Trusts, CFDs, OEICs, Bonds, VCT, EIS, Stocks & Shares… etc, etc, etc]

But what about:
• House [main residence, second home, BTL, property abroad, time share…] and regular revaluations
• Other assets
> Land
> Car [s]
> Boat
> Contents and valuables
• Inheritance expectation or potential [???]
• Liabilities and financing arrangements
> Mortgages
> Personal loans
> Credit cards
> Other short and long term commitments [school/University/wedding/Long term care???]
• Income

And so the list could go on.

Some, indeed many people may have a simple ‘wealth profile’, whilst others – often the ‘high net worth’ (HNW) individuals – may require a higher degree of processing horsepower (stochastic modelling) to capture analyse and advise upon their ‘profile’. The latter are invariably the target of advisers and providers alike and will undoubtedly be able to afford to pay the fees associated with the Wrap service offerings that are being created. However, these people are also very astute and will be asking questions about the relative [comparative] value that the Wrap will offer over and above their current arrangements.

Indeed, the increased complexity feeds through to the costs of creating and managing the service. The dilemma for adviser and client alike is what incremental value can be added from capturing, valuing and analysing the entire assets of the client… is this a case of the 80/20 rule? Indeed, many current offerings are primarily focused on the investment portfolio with only limited or no attention being given to other need areas.

One thing is for sure; millions of pounds has been and is being spent by the Product providers who are keen to ensure that they have a Wrap solution. Who is in the best position to create a Wrap solution [Provider or Adviser]? That depends who you ask, but it is the Providers who have the deeper pockets and it is seen as a good way to secure distribution – albeit that Advisers will be nervous of potentially being ‘locked in’ to a providers solution! Is one solution sufficient? There has been research that shows IFAs will chose more than one platform and may even have as many as 4!

Fund Supermarkets may also face competitive pressure and so try and move towards a Wrap model, though this may not be easy with their current charging methods.

There has been speculation about the suitability of foreign providers such as the Australians bringing their solutions into the UK. Whilst they have worked in their home market and may be suitable for the UK, as with so many past examples, the devil (and potential cost) is in the detail.

Technology can be used to manage much of the complexity. Current back office providers will be looking to see what elements of their solutions need to be augmented or enhanced. Some will partner and others will undoubtedly build. However, development comes at a price and the demand for functionality needs to be tested for value and strategic fit before it gets added to the product roadmap.

The power and use of technology is only just beginning to scratch the surface. Even now internet access can create a secure visual and verbal means to communicate with clients in multiple locations, including updating information, providing illustrations and ‘what if’ scenarios along with real time transactional capability. There will be those who say that technology gets in the way. Sadly this is more a reflection of attitude and some poor implementations in the past. Consumers are increasingly using technology for a range of services from banking to shopping and will increasingly expect to be able to access their financial services information in real time and carry out transactions with or without the adviser!

With the state of flux in the market, proper thought, not emotion needs to govern adviser and providers decisions alike. Competitors may use Wrap as a way of trying to approach advisers and clients, so whether you plan to have Wrap or not think about a communication strategy that is pro-active rather than defensive. As with the ‘wild west’ it was the early pioneers who got the arrows and the fast followers who got the fields! The stakes and costs are high and the strategy needs careful thought and not just a ‘me too’ philosophy. We would urge advisers and product providers alike to examine the impact that Wrap will have on their current and future business models… remember; act in haste, repent at leisure!