The type of platform favoured by an advisory firm is usually a good indicator of what type of firm it aims to be. The platform due diligence required by the FCA means that advisers have to document the reasons behind their choice of platforms – this forces them to evaluate their client book and select the platforms that best meet their needs.
All 20 or so adviser platforms have their peculiarities; however we can categorise the platform market in a number of ways: size, relative suitability for different client segments, degree of vertical integration etc. Most simplistically, the industry tends to make a distinction between the oldest, biggest three platforms in the market – Cofunds, Fidelity FundsNetwork and Old Mutual Wealth – and the newer offerings. These first three are commonly referred to as fund supermarkets, which offer fewer types of investments and tax wrappers and historically ran a remuneration model based on rebates.
Conversely, the ‘wrap’ platforms are so-called because they are seen to offer a wider range of investment options – ETFs and DFM access, for example – and tools. These platforms have operated an explicit charging model since their inception.
Advisers still predominantly using the fund supermarkets look quite different from those wedded to the wrap platforms. Segmenting the two groups by the platform they use the most, we can learn a fair bit about the different types of advisory businesses in the market. The chart below illustrates how investment propositions vary depending on primary platform used. Bear in mind that although an adviser may tell us that their primary platform is Cofunds, they are still likely to be using one or even multiple other platforms.
Still, the disparity between the two groups is stark. In the wrap camp, advisers are placing significantly more assets through in-house model portfolios. The fund supermarket loyalists, on the other hand, still have the bulk of clients’ assets in bespoke portfolios – mostly designed in-house. Roughly a fifth of the wrap group’s assets are managed by DFMs on a model or bespoke basis, compared to a tenth of the fund supermarket group’s assets.
What strikes me when looking at these research results is the extent to which a certain segment of the advisory firm has changed little in response to the RDR. These – mostly one-man band or similarly small firms – have not left the profession in droves as predicted. Yet the sustainability of their business model has been thrown into question. Very recently I spoke to an adviser at a mid-sized firm, who made the point very clearly to me: “Most IFAs don’t have a research team that is big enough or a process that is robust enough to strip out fund managers they know and enjoy, and pick the best funds for their clients. Advisers should be out seeing clients and winning business.” On the flip side, it may be more difficult to articulate one’s value as an adviser if this doesn’t include fund selection. Damned if they do, damned if they don’t, you could say.
Over the past few years, consolidator firms have been hoovering up some of these smaller firms. This acquisitive activity looks set to continue. Consolidators seek to bring acquired business into the fold of their centralised investment process. This is a challenging task involving a lot of extra communication with clients to convince them to accept a portfolio revamp, but once achieved it will see a shift away from bespoke portfolios.
A potential decline in the number of one- or two-man bands will have an impact on the platform market. One may expect wrap platforms to be the main recipients of new clients; net sales data over the past 18 months supports this, and for the first time in the first quarter of this year, the collective market share of the three fund supermarkets fell below 50 per cent. However, Old Mutual Wealth now offers a host of OMGI-managed investment solutions that could plug the gap. I also suspect that over time, portfolios built via fund supermarkets will start to look more like those on wraps. Many advisers now believe that for accumulation portfolios at least, there is less need for individually-tailored portfolios – the bulk of clients have quite similar needs and fall into a narrow band of risk profiles.
And if nothing else, regulatory pressure will drive conformity. “If you don’t want to get shot, don’t go into a warzone,” exclaimed one high-end IFA to me. Unless, I suppose, you have a sufficiently substantial battalion in tow.