Platforms and retail market share: how high is high tide?
Platforms have gained a commanding share of retail advised assets. But how commanding and how far will it go?
To understand that, it’s worth revisiting the platform value proposition – for investor and adviser.
The UK is notable in having a strong platform segment focused on consumers, and another focused on advisers. The two are relatively distinct, reflecting the difference in value propositions.
For the consumer, a platform represents an alternative method of assembling a portfolio of funds, investment trusts, shares, real estate, deposits, and other securities. Prior to the advent of platforms, these components were acquired one by one, each with their separate disclosure, purchasing processes, servicing, reporting, and in combination requiring what was often manual administration and tax calculations to maintain.
A platform offers consumers a central implementation, management, administration, servicing, and reporting capability. With sufficient scale, platforms provide consumers with access to institutional grade services at lower prices than a consumer could achieve on their own, and reduces the time previously spent on manual maintenance. The platform charges for those services of course, capturing some of the savings, but the consumer should – in theory – still be ahead in net terms.
For the adviser, the set of services delivered by a platform is fundamentally similar, but orientated to the needs of the adviser over the consumer. In the pre-platforms world, advisers had two serious business model problems – back-office administration load and cost, and lack of control over their own revenues (which were largely controlled by product providers).
Platforms promised solutions to both. The back-office administration solution experience has sometimes fallen short of adviser expectations, but platforms have been particularly effective in giving advisers control over their revenues. This has transferred significant portions of the value chain from product providers (especially asset managers) to advisers (also to platforms in the process). Advice is now usually the biggest component of the advised value chain, ahead of asset management.
In transforming their operating and business models, powerful incentives have been created for advisers to move client assets into the platform environment. As today’s chart indicates, unsurprisingly advisers have responded to these incentives. In 2017, advisers participating in NMG’s BQM Retail Wealth Study reported that over 70% of their client assets were on platforms, a significant increase in the past 4 years.
Proportion of Retail Advised Assets Now on Platform
Source: NMG BQM Retail Wealth Study 2017/2018
This raises the question of how high the platform tide will rise in terms of retail advised assets.
Flow metrics suggest that there is further to go. Pension and drawdown business has become a key source of retail new flow; advisers report that 79% of this business is being placed on platforms. The tide looks like it is more likely to rise towards 80% rather than retreat.
What are the prospects for off-platform businesses?
There are some strong off-platform businesses in UK retail wealth, including Royal London, Prudential, Scottish Widows, LV=, Aviva, and Standard Life, each with over 10% of the off-platform market. Some of these also have a platforms business, or may develop one in future, giving them an option on the market direction. But participation in platforms is not a simple decision despite their share of retail assets and flows because of the tough economics – the investment required is huge, competition is strong, and platform profitability is currently low.
Off-platform is not necessarily condemned to an ever-shallower part of the retail pool. Like other businesses, advisers segment their clients; certain segments – for example small to mid-sized clients with straightforward needs – are better suited to a simple and robust off-platform product.
Accordingly, a sound off-platform business requires careful segmentation, targeting, and persistent focus on the chosen target(s). That is also true of on-platform – the best platform businesses also have a clear segment focus – but all the more necessary when the opportunity is smaller.
Of course, platform omnipotence should never be assumed. Platform economics work (when they work at all) mainly because of vertical integration – something under intense focus in Australia where an inquiry is essentially asking whose interests are being served. Regulatory intervention can never be dismissed. And always lurking in the background is the shadow of the next technology innovation which delivers the main platform benefits sought by consumers and advisers, but with less complexity and lower cost.
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