The world of platforms has changed immeasurably since RDR, so what’s next for the various models on offer to advisers and clients? Richard Budnyj takes a look…

For many years understanding the cost of buying an investment product was a challenge. The Retail Distribution Review (RDR) brought more clarity and easier comparison, which has led to a price war between the providers, but are current pricing levels sustainable?

In the post-RDR world, consumers, whether advised or non-advised, can now compare the total cost of purchasing an investment product more easily. Although the cake may look the same on the outside, the ingredients now get more scrutiny prior to purchase.

In simple terms, the ‘product’ cost for the investor can be broken down into three parts (or two if non-advised):

  1. The investment wrapper provider
  2. The investment manager
  3. The adviser

Let’s tackle these in reverse order…

The adviser

Pre-RDR, advisers typically received 50bps in commission from the product provider. Post-RDR, though many advisers have fared well by adapting their business models and segmenting their clients to focus on those who believe in the service value they bring, not enough clients have been willing to pay directly for advice. As a result we have seen a rationalisation of advisers.

We are also left with a great swathe of clients who, due to the size of their investment pots, are not a viable proposition for advisers anymore but who do need advice. Yes there are people out there who can ‘DIY’, but a large population have been left in limbo, leading many providers to see this as an opportunity and set up D2C propositions

The investment managers

The investment managers have had to deliver new fund classes, but overall one could argue they have not had to cut their cloth to the same extent as providers are having to. I suspect they’ll argue they are about value and that the net return given to investors is the most important thing. As an investor I am happy to pay the value premium

The product provider

The product provider level is where we are seeing significant pressure for reductions in price, with some calling it a race to the bottom. But for how long can they sustain this position?

We currently have a number of smaller independent wrap platforms who arguably have the right business model but are struggling to make profit because they don’t yet have the required scale.

To succeed long-term, they need to increase assets under management and their low cost base means the break even point is far lower than platforms with a life company heritage.

But, given the huge influx of assets onto platforms in recent years, successful independent platforms are likely to be those which can now attract assets transferred from other platforms.

For the platforms which have grown out of traditional life companies, although they have the scale in terms of assets, they also have the high costs associated with servicing legacy business and so are also struggling to make a profit. These companies are under greater pressure to scale further as their breakeven point is much more challenging.

Does the model work?

Many life company providers are turning to technology to improve efficiencies and reduce costs, but that alone is not enough.

For example, let’s say a provider’s total average costs equate to 50bps, but the market expects to pay 25bps. The total costs break down as 50% operations, 25% distribution and 25% corporate overhead. Even a 50% increase in operational efficiency through technology – straight-through on-line processing for example – will only reduce total cost by 25% to 37.5bps.

The old life company service model just doesn’t work in the new world, and updated technology alone cannot create long-term profitability for many platforms.

There needs to be a radical change in the model; a change of ingredients in the cake – taking some out, reducing the quantity or quality of others.

Advisers can no longer expect providers to be the cheapest while still providing support services at the level they have done in the past. Distribution models need to change. Traditional fat management structures and expensive buildings cannot continue to be supported.

What next?

I think there are two basic choices…

  1. Reinvent the business in a new-world context with digital at the core and mantra of operational efficiency throughout the organisation that is focussed on eliminating errors and avoidable costs.
  2. Acquire scale through consolidation (mergers and acquisitions).

Consolidation within platforms is an obvious play. While in the past, the difficulty of combining different technologies has prohibited consolidation, now the vast majority of platforms are on one of four technologies (Bravura, GBST, FNZ and Bluedoor), making it easier to merge businesses on the same technology platform.

Given the decreasing opportunities for organic growth, it makes economic sense that some of the larger providers will gain scale by buying some of the smaller players.

In reality, the industry is likely to see a mixture of the two options: greater operational efficiency within the life companies alongside some consolidation with the smaller players.

What is clear is the current model isn’t sustainable for most; we can’t have our cake and eat it. Let’s see what happens in the next 12 to 24 months – it’s time for the brave to earn their worth!