Andrew Power, lead RDR partner at Deloitte, says: “The result [of squeezed margins post RDR] will be that the intermediary platform market will consolidate to fewer than ten large providers and a few specialists, compared with about 30 platforms today.”
Points lost
He bases this on margins being squeezed to the extent that platform revenues will fall from around 30 basis points to 20 within the next five years, increasing the break-even point for assets under administration from around £20bn to £40bn.
Unfortunately this is about all he says. There is no mention of any background research, or of the companies who contributed to any survey, or the difference in the business models (fund supermarkets compared to wraps) that he looked into, the types of business administered (expensive SIPPs or cheaper ISAs) and so on.
By comparison, last year Momentum Global Investors produced a white paper with similar consolidation claims, predicting the 30-something players will whittle down to ten or 15 with the bigger players benefiting through single or even multiple acquisitions.
There is little doubt platforms will play a bigger – and more central – role in the chain that links the fund groups, intermediaries and the individual end investor. Power himself suggests the value of assets held on platforms will increase to £600bn by 2018 from around £200bn today; Russell Andrews, the author of Momentum’s research, talks about an increase from £160bn in 2011 to £225bn at the start of this year.
Point less
As great a soundbite as Power’s comment may be, it is meaningless. It is certainly meaningless in isolation, with no concept of the work done to make what are very broadbrush statements.
For example, in answer to his comments about the move from 30 to 20 basis points, David Ferguson, chief executive at Nucleus, says: “I don’t believe it is at 30 now, more likely 35 to 40. At Nucleus we are at 35 basis points including SIPP business. You can get it cheaper elsewhere but then you have to pay separately for the SIPP.”
People have been having similar conversations about the fund and wealth management sides of the industry for the past 20 years and nothing has really changed. The news today Miton is buying PSigma Asset Management is the latest in a dribble of occasional M&A news but there is still no sign of any step change that will see a hugely different landscape.
The same dribble is likely to be the case for the platform industry as well.
At the moment, there are only three platforms that administer in excess of £20bn of assets – Cofunds, FundsNetwork and Skandia, four if you include Hargreaves Lansdown. Only Cofunds has in excess of £40bn and it is debatable whether it is profitable on that scale at the moment.
Standard Life is another of the so-called larger platforms, with ‘only’ £14bn of assets; Axa’s Elevate has £6bn; Nucleus has £5.5bn; Ascentric has £5.2bn; Novia has less than £2bn.
Nucleus broke even, confirmed Ferguson, between £3bn and £4bn, adding that Transact did so closer to £400m.
“If we had £40bn in assets under management today I would not be happy unless I was making multi-millions of pounds in profit,” he added.
Competitive market
A couple of big players have already fallen by the wayside, with American Express and Macquarie entering and leaving the UK platform market in fairly quick succession.
The question is not one of resource or scale, as these last two examples show, which is just as well as I think it highly unlikely that in the next five years we will see a leap of £400bn in assets held through the platforms that exist today.
Fraser Donaldson, insight analyst at Defaqto, said: “Five years is a long way away and the assumption is everyone will jump on the platform bandwagon, especially given RDR’s push for intermediaries to get their admin right.
“But we should also expect the cost of technology to come down in time so there will be savings there as most of the hurdle towards profitability is the cost of technology.”
Given their size, it would have taken Cofunds, FundsNetwork and Skandia a long time to gain profitability so there is still room for smaller, more nimble platforms to operate, some of which have already broken even with a fraction of even £20bn in assets. According to Bella Caridade-Ferreira, a director at Fundscape, Novia, for example, broke even after three years at around £1.5bn and has built up assets since then.
“Deloitte has made the classic mistake of looking at the old style platforms when the newer platforms are more nimble and can adapt to the changing environment more quickly,” she said.
No change
Power and Deloitte’s premise may have started out on the right path – there is some logic to platform margins being squeezed making it harder to generate a profit – but I think it is unlikely that we will see consolidation to the extent he claims.
Skandia disagrees, with a spokesman saying: “The new platform rules confirmed by the FCA have removed the differences that used to exist between wraps and fund supermarkets. We now have a market where all platforms are differentiated on the key metrics of functionality, value and service.
“On that basis it is hard to see why the market needs in excess of 30 platforms offering similar services and the majority of business goes to the larger players.”
I agree. The market simply does not need in excess of 30 platforms but I just cannot see things changing that dramatically.
At the time of writing, Deloitte is unavailable for comment, but if they do get in touch I will let you know what they say…
