On Investing

Advisers’ platform choices reveal their colours

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.

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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.

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On Investing

How ‘open’ are open architecture platforms really?

In the UK and, indeed, across Europe, investment platforms have been hugely important in powering open architecture for institutions (banks and insurers), financial advisers and the end investor. Platforms are often termed ‘fund supermarkets’; users can chuck anything in their shopping basket with no restraint or possible bias other than affordability, although product positioning and special offers are designed to guide the consumer to the most profitable lines.

One French platform revealed that their top 30 funds typically receive 85 per cent of net inflows; a Luxembourg-based platform reported that 85 per cent of assets are held by the top 20 managers despite making available close to 400 fund managers; and the top 20 names represent 60 per cent of platform assets for a major Swiss platform. What are the reasons behind this concentration, and how ‘open’ are open architecture platforms really?

Concentration has historically been high in Europe, but the tide is turning as major Italian tied networks embrace third-party funds and the banks in Spain gradually open up to non-proprietary products. Across the region the likes of M&G Investments and others with blockbuster funds gain ground with big distributors. MiFID II could intensify concentration as the rebate incentive is removed in some channels, or encourage wider choice as consumers wise-up to cost and demand better options.

In the UK, there have been two conflicting forces at play. On the one hand greater professionalism among advisers has meant a reduction in fund manager concentration overall as they move beyond over-reliance on two or three of the biggest fund houses, or engage with DFMs who pull from a wider range of investment products on their behalf. However, on the other hand some players are including fewer funds in investment propositions to cut down on due diligence work and employ better negotiating power with fund managers, or are using investment solutions instead of bespoke client portfolios.

Fund and fund manager concentration is also driven by the machinations of the platforms themselves. Many providers have asset management capability, and thus are more inclined to promote proprietary products. Others were originally developed to sell proprietary investment products via internal channels, and have only more recently extended their remit to external advisers and third-party products. Looking at the UK market, the clout of an in-house manager varies hugely, accounting for anywhere between 10 per cent and 40 per cent of a platform’s assets.

Old Mutual Wealth (previously Skandia) exemplifies the growing trend towards vertical integration in the platform market. The provider has its WealthSelect range of sub-advised funds for advisers, and the Cirilium range run by Old Mutual Global Investors for the Old Mutual-owned network, Intrinsic. And let’s not forget the recent Quilter Cheviot acquisition.

In a role reversal, D2C leader Hargreaves Lansdown has become a fund manager in its own right by building on its range of multi-manager funds. The Wealth 150 researched fund list is the shop window display, and each multi-manager fund a ‘three-for-two’ offer in prime position on the shop floor.

Where platforms are not running funds themselves, there is still incentive for them to steer flows. The range of funds is narrowed by providing investment solutions and select lists, making it easier for larger platforms to negotiate down asset management costs and bolster margins.

We wanted to give some insight into what products are most commonly appearing in platform users’ shopping baskets. We asked the major UK B2B platforms to share the top five fund managers by assets under administration on their platforms. The groups who responded had combined assets under administration of £208bn at the end of September 2014. The resulting infographic takes into account both how frequently fund managers featured in top five lists and the relative sizes of the platforms.

topmans

Naturally, the fund managers affiliated with a platform have relatively strong clout, as well as the likely suspects of Invesco, M&G, Jupiter Asset Management and BlackRock (including iShares). Dimensional and Vanguard have been relatively popular on the smaller, newer platforms that have always had an unbundled pricing model, while investment solution providers 7IM and Omnis (the in-house manager for the Openwork network) also feature as top managers.

One suspects that vertically-integrated platforms will continue to see growth in in-house investment product assets. Meanwhile, the more ‘open’ platforms may see passive fund managers eat into the share of assets held by the asset management incumbents, and thus reduce concentration. The UK platform market continues to support different business models and offerings, in spite of the nay-sayers who believe that the market is too crowded.

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