Adrian Murphy gives his three top tips on platform due diligence based on lessons he's learnt along the way.
We have worked on and improved our due diligence process over many years. We started out with fairly light due diligence but now we carry out an annual review of the platform market and aim to ask providers difficult but important questions.
Although we don’t think you need to change your platform every five minutes, we take it very seriously. Here are three lessons I’ve learnt along the way in improving our processes:
1) Don’t get distracted by bells and whistles
In the past we focused too much on platform tools even when we wouldn’t use them. If your due diligence involves counting how many tools a platform has then I think it’s a waste of time.
We used to consider things like integrated risk profiles or model portfolios or performance analytic tools on platform. The reality is every platform now has some version of something like that and that’s not where your focus should be. At the very start we didn’t fully appreciate what a wrap was and we were too impressed by all the bells and whistles that we didn’t even use.
On the flip side, what we have come to realise much further down the road that a platform’s ability to integrate with third party tools is much more important than the tools they already have on their platform if you end up just not using it.
Ultimately what you’ll find is it comes at a price, if you’re not using these tools then it’s not valuable. On paper, platforms may look incredible because they have all these tools but if you don’t need them, then they’re not worth it.
2) Don’t listen to platforms’ own hype
Another lesson we learnt over a number of years was don’t listen to everything you’re being told by platforms, and don’t just rest with what they’ve said to you if that doesn’t satisfy you. When you start asking more difficult questions, for example on profitability and business plan, you have to be sure you believe them and you’re satisfied with their answers.
In the past we weren’t happy with the direct contact to clients strategy our previous platform had and we were not convinced by their answers for it either.
We could see the direction of travel for that business and it was not where we wanted to go so we went elsewhere.
You think about profitability and you see huge platforms with an incredible amount of assets but they can’t even make a profit. It is actually impossible to get profit figures from some platforms, because the platform business is integrated into the overall business and most don’t separate it out.
Those platforms will tell you everything is fine, although they won’t tell you profit figures, they will tell you how many billions of assets are going on, but not necessarily how many are coming off.
Don’t listen to a platform’s own hype, get your own information and if a platform is unwilling to give you the answers you need, don’t use them.
3) Try to understand the underlying technology
Although it’s easy for me to say this as a Nucleus user, as Nucleus went through its re-platforming process a few years ago, with a lot of pain, it is important to find out when a platform is looking to upgrade its technology and what problems could emerge as a result.
If platforms are working on really old technology that needs to be upgraded, then that will cause problems, especially if they have legacy systems and other things to make it complicated.
This is something we wouldn’t necessarily have considered in the past, but after Nucleus re-platformed, it now makes sense to us to have this as a key point in our platform due diligence. We would want to understand a platform’s technology plan now as a result, because it’s always going to be painful to change technology, but these are the things you need to know.