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How to tap into the big XO opportunity

How to tap into the big XO opportunity

Recent findings from a Pershing study suggests the appeal of self-directed investing shows little sign of abating, with 49% of wealthy individuals saying they look after their own portfolios.

This figure, the impact of the retail distribution review (RDR), and the recent changes announced in the Budget suggest there is a big opportunity for wealth management firms to pick up business in this market. The question is, how?

Sanlam Private Investments (SPI) was one wealth manager to recently take the plunge, launching its execution-only (XO) platform, SPI Direct, last September. It was launched as a standalone division, separate from its advisory arm.

Rob Russell, who heads the XO service, believes the opportunity underlined by Pershing’s research is the fact both new and legacy clients will migrate between the XO service and other offerings. While the platform is open to all clients, a ‘lighter touch’, cheaper version of the firm’s discretionary managed service is available above the £50,000 threshold.

Russell said in just over six months, around 80% of new clients on the platform enquired about other services. ‘Those arriving on SPI Direct first usually don’t meet the £50,000 minimum investment required for the managed funds solutions. As they build up their capital, they will then make enquiries about the managed services.’

Added to this, 20% of legacy clients want to start using the XO platform as part of their overall service. ‘Execution-only trading can add to the breadth of a possible portfolio,’ Russell said. ‘We’re currently seeing people who are using contracts for difference service (CFDs) or spread betting to monetise their view of the markets or as insurance against positions held physically.’

His view is shared by Rod Hudson, who heads Charles Stanley Direct, the company’s XO platform. The firm’s trading update for the 12 months to the end of March revealed the XO platform has over 15,000 clients and assets under management (AUM) of over £200 million.

Hudson said individuals who opened an XO account have enquired about other services. However, it works both ways in that the rising power of self-directed investing means some discretionary clients who used one particular XO provider in the past were now interested in having ‘only one supplier rather than using lots of different types of investment management businesses’.

Investing: In-house or white label?

SPI opted for a white label application from London Capital Group rather than develop an in-house application. While Russell said this involved ‘a lot of development to work in getting a front end of the system in line with our corporate branding entity and the marketing that’s required around a white label’, he described it as ‘the way to go’.

‘Each organisation can give it its own look and tweak it, and it’s much more efficient from an expense point of view.’

Conversely, Charles Stanley’s service was developed from its existing online capabilities, such as its now-closed Fast Trade share dealing service. Using the existing back office, the majority of the investment went into developing its infrastructure as well as the positioning of the business, including the look, feel and branding of the platform.

‘It’s a very different market to an intermediated market, whether that is financial planning or investment management, so sticking up a website and hoping that everyone will come to you just doesn’t happen,’ Hudson said. ‘You have to be clear on how to attract clients.’ In his view, white-labelling is less cost-effective.

For Compeer senior analyst James Brown, the XO business, however it is rolled out, presents opportunities for wealth managers, with total XO assets hitting a record £113.3 billion last year.

‘RDR helped but XO has also been growing rapidly and consistently over the last seven years,’ he said. ‘It’s now one of the most profitable sectors within UK wealth management and can cater for any value client. If there are firms considering launching an XO division, I would understand why. However, it is a very competitive market out there, so it’s not to say if a firm set up an XO arm now it would pick up instantly.’

Not all firms are keen though. Rathbones finance director Paul Stockton said the company is not considering  XO. ‘While we can see some opportunities with the XO proposition, discretionary is our core offering and we’re keen to stay there.’

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