Wealth management companies that have sought to diversify revenue streams by launching platforms for advisers and consumers could find they fail to grab any market share from the incumbents.
It is a pessimistic conclusion delivered by Bernstein in its post-retail distribution review (RDR) report on the platform market. Analyst Edward Houghton said the tail of platform providers will reduce over the next few years.
As most wealth management businesses feature in the bottom quartile of the platform and wrap market in terms of assets under administration, the research hints it is likely they could prove inefficient to run in future years. This means they could fall victim to consolidation or simply withdrawing from the market, since scale and operational leverage are integral for survival.
Close Brothers, led by Martin Andrew (pictured), Parmenion, James Brearley, Charles Stanley and Bestinvest all feature among the bottom quartile, with sub-£5 billion of assets, while 7IM looks slightly better placed in the £5 billion to £10 billion bracket, according to data from Platforum and Bernstein.
In contrast, Bernstein expects the St James’s Place model, which is full service but with no fully fledged internal fund management, to win out over the Standard Life/Old Mutual models, where their own fund ranges are offered.
Investment solutions critical
Bernstein believes investment solutions or guidance and/or fund management will become increasingly critical to margin sustainability as fees continue to come under pressure – and it becomes even harder to make money from administration alone.
However, providing in-house funds via a platform creates an inherent challenge when it comes to marketing the service as a genuinely open architecture platform, he notes.
For example, in the fourth quarter, 34% of a total of £17.5 billion in gross sales (equating to £5.9 billion) went into model portfolios, according to figures from Platforum.
Houghton also highlights the challenges fund groups are facing post-RDR in terms of their relationships with platforms. He believes the power will still lie with the platforms.
‘Fund managers are faced with a choice: lower their fees to gain platform access, or maintain them but risk exclusion from platform providers,’ he said.
‘Who has the balance of power? In the case of platform providers versus fund managers, we suspect the platforms will win as the fund management industry is so fragmented. There is some evidence for this: fund managers have reduced fees on platforms by 20-25% over the last three years,’ the report noted.
Overall, the opportunity for platforms to continue to attract assets remains in place, albeit with compressed fees, particularly following the significant Budget ISA and pension changes. Around 98% of ISAs and 78% of self-invested personal pensions (Sipps) are now held on platforms.