‘Financial stability’ is consistently among the top ‘musts’ of the perfect platform. Advisers rated it ahead of ‘low charges’ as the top ‘must’ in Q4 for the first time. But is all this just confirmation bias? In today’s email I will dig in to the detail of these findings, explore what advisers mean by financial stability and how they can measure it.
Financial stability isn’t a universal concern. Advisers that include it among the top ‘musts’ of a perfect platform typically put it as the most important factor. It is either the most important ‘must’ or doesn’t really figure.
And it is a fairly self-selecting group. Over a fifth of users of AJ Bell, Nucleus, Standard life, 7IM and Zurich primary platform users rate financial stability as the top ‘must’ of the perfect platform. Most of these have made strong public cases for their own financial stability (and in the case of Nucleus and AJ Bell, their profitability).
I mentioned earlier the term ‘confirmation bias.’ Could advisers be choosing the ‘musts’ of the perfect platform to align with the platforms they are already using? Transact users are more likely to rate service as the top ‘must’ while Alliance Trust Savings users rate ‘low costs’. Perhaps I shouldn’t be so cynical on this sunny spring-like morning.
What does financial stability mean?
Advisers tell us that when they select a platform they are looking for a long-term business partner. The hassle of switching or transferring platform is significant. We think there will be further consolidation of the platform market. While 44% of assets currently sit on the top 4 platforms, we expect that to rise to as much as 75% in five years. Advisers don’t want to recommend a platform that shortly thereafter is acquired. So is going with the scale players the safer bet?
Aegon is in a scale game. Senior execs at Aegon have been clear that scale delivers shareholder value, money to invest in development and lower cost.
Analysis of comments in our surveys suggest that advisers equate size with financial stability. For example, last month, a Standard Life user told us it “is very reliable and strong financially”. Equally, an Aviva user told us “I like that the platform is well known and has good financial strength.” And, another adviser, commenting on FundsNetwork said: “Like that Fidelity is also a fund manager, financial strength and not just a piece of IT.”
But size isn’t everything. The firms that have exited the platform market are among the most financial stable firms around: L&G, AXA, UBS and American Express.
How does one measure financial stability?
Advisers we speak with often consider several factors to assess financial stability of the platform. We recommend considering the following:
1. Profitability and growth
2. Corporate strength
3. Strategy and focus
4. Shareholder commitment
5. Future cash flow commitments and funding
Profits are important – especially to shareholders. And different shareholders have different time horizons. Royal London might be prepared to play a longer game than Standard Life (or maybe the other way round).
We recommend considering profitability in combination with asset growth. Asset growth – relative to market returns and AUA growth for peers– can be a good indication of health of a platform.
Profitability of the platform is often tough to measure and the importance to shareholders hard to assess – especially in vertically integrated and globally diversified businesses. Zurich for example is a relatively young platform. The expectation of profitability should be different than for a more established player. And Zurich (like many of its peers) doesn’t publish financial reports for the platform as it is part of a larger business unit.
This is where strategy and focus come into play. In a large life company, understanding the company’s global strategy can be helpful. AXA for example has a classic bancassurance model. I’ve been told that they wanted to be a top three player in the UK. It didn’t matter how profitable the business was. If they couldn’t be a top three player, the business wouldn’t survive.
We suspect that pure platform operations are never going to produce enough returns for most owners. They will need to do more than one thing. That could mean buying advice firms (but that tends to be better for securing the marketing base than for earning profits). More likely they will move into running money. DFMs and fund managers still have pretty healthy margins and platforms could get into the area with relative ease and credibility. The lessons from the valuation of 7IM haven’t gone unnoticed.
While it may be harder to return a hefty profit to investors, it can be an advantage to have the platform as a core focus for the business. It is very easy for a large and diversified business to turn against a division in favour of investing elsewhere. In the case of say, Transact, this just isn’t a risk.
We expect to see further consolidation and rumours have been swirling since the start of the year about firms that are looking to sell their platform business. Transact have also clearly signaled their intent to IPO in 2018. We’ve been asked by several advisers the implications of that IPO. It could prove a good thing for Transact and its customers. Most importantly it will provide shareholders with the ability to trade shares if they wish, with a market price for those shares. We do worry about the inevitable consequences of being a listed company and the impact on culture and Transact’s USP of independence.
Even the most thorough financial review of a platform might not sniff out a future shift in strategy. As far as the regulator is concerned, an adviser should look for any negative financial information about the company and take that into consideration. The above list of five criteria might help to get a bit more detail for those that are worried.
Thank you to Phil Young, Rory Percival, Stan Kirk, Alistair Wilson, Ian Taylor, Danby Bloch, Peter Mann, Miranda Seath and others who preferred to remain anonymous for your comments on this piece. For others who’d like to comment, email me at heather@platforum.co.uk or on twitter @heatherahopkins