Of all the things that advisers have to worry about, should profitability and long-term sustainability of platforms even feature in their due diligence? After all, client assets aren’t directly at risk, says Abraham Okusanya.
This is a fair question. Our view is that the profitability and long-term sustainability of a platform is crucial and should play a key role in adviser due diligence, for a number of reasons.
- Platforms are a key part of an adviser’s business. By recommending that clients keep their wealth on a platform, advisers are essentially saying that they are in the game for the long haul. Accordingly, the onus is on the adviser to ensure that they leave no stone unturned in ensuring that the platform is both functional and sustainable.
- Platforms are for life, or at least, that should be the intention when they’re selected. With a typical client facing a retirement of over 25-30 years, the last thing they want to have to worry about is the risk that their platform might be shut down, exit the market or fall behind in terms of technology and service. While the demise of a platform doesn’t pose a direct threat to client assets, lack of profits to reinvest in technology and service delivery hampers an adviser’s ability to deliver on their promises to clients. Platforms are businesses and without profits, it’s hard to see how a business can continue to exist, compete and serve its customers.
- If a platform did fail, exit the market or was passed onto a new owner that the adviser as uncomfortable with, moving assets to an alternative platform is likely to come with additional cost and headaches for both advisers and clients. Who bares that cost? And of course, Mrs. Miggins may well think, “If my adviser is wrong about this platform being around for the long haul, what else are they wrong about?”
- Finally, its stands to reason that profitability will place a greater role in pricing going forward. In the heyday of platforms, everybody that could enter the market did — even if just to have a go at it. Life companies spotted the emergence of platforms as the hub to hold people’s investments and retirement wealth, and the risk of ‘missing out’ was far too great. But as platforms mature, providers are establishing their position in the marketplace. Each provider is now evaluating how accurate — or naïve — their initial projections were. We are beginning to see a clear difference between those who really have a clear chance in the market place and those who are struggling to make it work.
Going forward, it would be harder for loss-making platforms to cut prices, just to keep up with competition. As yield on assets fall, even providers with very deep pockets will have to decide if they should cut their losses. Profitable platforms are far more likely to be stable and consistent in their pricing going forward, and their clients are more likely to benefit from the economies of scale as assets grow. Conversely, loss-making platforms will find it harder to justify further price cuts or pass on economies of scale to clients.
Advisers with clients’ assets on perpetual loss-making platforms should at least have a contingency plan in place or model the likely scenarios in the event of a provider exiting the market or shutting down. What’s the likely cost of migrating assets? How will you ensure that clients are informed and reassured?
One thing is sure, the structure of the platform ecosystem will change over the next few years, and it’s part of an adviser’s role to anticipate the likely changes in the marketplace in their selection process. We think that well-run and profitable platforms are far more likely to weather the storm with the least disruption to clients. As far as service delivery is concerned, it’s business as usual for those platforms. Of course, nothing is permanent and that’s why we will keep our eyes peeled to see how the industry evolves. That means err…. job security for people researching and analysing platforms. I like the sound of that!
A copy of FinalytiQ’s Platform Profitability Guide is available at http://www.finalytiq.co.uk/guide-to-platform-profitability/