The fund platform market has changed significantly with the passage of various regulatory initiatives around inducements and retail investor protection in the UK and EU. The market is developing fast and it is crucial industry participants keep up with the pace of change.
Platforms are a vital component of the fund ecosystem. The industry is increasingly trying to drive down costs and risk while simultaneously delivering improved competition and value to end clients. Platforms play an integral role in the rapidly evolving investment management supply chain. While regulation may be eating into product resources and stifling innovation, platforms must still retain their competitive edge and not compromise on their first class service offering.
Calastone explored these issues at the Fund Marketing and Distribution 2016 Conference in London with Simon Ellis, Global Head of Client Segments at HSBC Global Asset Management; David Moffat, Group Executive at International Financial Data Services; and Bella Caridade-Ferreira, CEO at Fundscape.
Costs and Opportunities
On platform assets are growing, yet many platforms appear to be struggling to translate this increase into profits. Some organisations have adopted a race to the bottom approach in order to secure business, which has had negative financial ramifications. “Platform operators tend to be unprofitable. Part of it is that they have been victims of their own ambitions. Many have cut rates on charges as a means to attain scale. So although many firms may have doubled their assets, their losses remain unchanged,” said Moffat.
Critics of the model routinely argue that taking into account cost-of-capital pressures, consolidation in these belt-tightened times is inevitable. This is disputed by others. “Scale is not necessarily the answer to platform profitability since many large platforms are still unprofitable despite having huge assets on board. Some smaller platforms that have outsourced practically everything except customer services, and which are not hampered by legacy assets, are profitable,” said Caridade-Ferreira. As such, there are opportunities for independent, boutique platform providers, particularly those that who are not hamstrung by legacy systems and burdensome technology.
The market is certainly ripe for new platforms. UK government changes allowing greater investment choice for pensions, and encouraging the next generation of savers, will result in more individuals looking to use platforms to access multiple products and asset classes.
Realising further efficiencies in the platform market is crucial to its future success. Ellis said platforms will in future aggregate more of their services as they do in the US. “Convergence of services for the consumer is inevitable,” he said. Simply running a platform on a standalone basis is not enough – it is crucial to supplement core services with others in a single product in what is known as vertical integration, whereby downstream products such as platforms are consolidated so as to streamline the sales process of fund products. This is the model adopted by Old Mutual Wealth and a number of life assurance companies. Proponents of vertical integration argue that it offers a more efficient service to the customer with no additional cost. “It is a very good route to market,” highlighted Moffat.
Another mechanism to improve efficiency and customer service could be through democratising the platform offerings to family groups as opposed to individuals. “I believe this will be the next round of development. Platforms will deal with families as opposed to individuals. It will be more of a banking-focused set up where you may have a patriarch or matriarch with the bulk of the assets, and it becomes a common pool of credit for other family members,” said Moffat.
The positive advances in financial technology in the institutional space are well documented, particularly in the areas of straight through processing, back office efficiency and data services. As the race to further intermediate the end investor gathers momentum, the leading financial technology providers are having to improve their institutional service value proposition by including state of the art direct to consumer functionality. Increased interest in robo-advisers, entities that provide computer-driven investment services to clients, is growing, with a number of platforms offering robo-advice already coming to market.
“People nowadays tend to buy goods and services off the Internet and many individuals trust their Internet providers more than they do traditional financial services. Robo-advice can be made available to the mass market. Furthermore, every stage of communication with robo-advisers and investors will be audited insofar as obtaining advice and requesting to receive advice. This should help appease regulators,” commented Ellis.
Others believe the impact of robo-advice will be more subtle insofar as the robo-adviser will act as a starting point for a client in terms of offering investment selection. Advice will be the preserve of humans, although robo-advisers would be able to glean huge swathes of information from the investor prior to having a human interaction. This will undoubtedly save time at wealth advisers. “It is critical that providers of robo-advice make their systems user friendly and simple. It is also important these systems are kept fully up-to-date,” said Caridade-Ferreira.
Nonetheless, the risk is that advances in robo-advice occur at a rate faster than regulators can cope. “Financial services is ripe for disruption. But the challenge is that regulation is written in the context of market events at the time, and it is not always forward-looking. This could be a challenge to robo-advice,” said Moffat. Regulators are, however, actively looking at robo-advice. The European Commission is reviewing marketing and distribution practices at fund managers with the view to scrutinising the role that robo-advisers may start to play in this space.
The platform market will witness many different scenarios over the coming 18 months. Some players may exit, others will merge and new entrants will come to the fore. There will be those who focus more on the equity or brokerage space, whilst others will join the race to win the enormous wall of pension assets. Traditional platform business models will also morph, as some platforms will go further into the administration place, whilst others will make a play further up the value chain by targeting direct-to-consumer opportunities. There will always be the traditionalists who will continue to fight it out at the top end of the advisor market. Making real time data more meaningful, better distributor insights and improving MI will be a key differentiator for all players, whatever their model. Many players will have an exciting vision, but will be hampered by legacy technology and a lack of funding to make necessary change. And here, as ever, is the crux of the argument. Brand, cost, service, innovation, regulation, margin and choice – all key parts in the jigsaw of success, but everything, absolutely everything is dependent on a flexible, innovative, robust and cutting edge technology partner.