It was a huge week for platforms. Standard Life announced its intent to acquire AXA Portfolio Services (including the Elevate platform) and Aegon announced that it would acquire BlackRock’s DC book of business.
Some believe it is the start of a massive wave of platform consolidation. However we disagree. This week’s deals make good sense for various reasons and while we do expect to see more logically-sensible rearrangements in the market, we don’t expect classic consolidation based on heft alone.
In short, welcome to the era of ‘smart’ consolidation not ‘size’ consolidation.
Standard Life-AXA: culture, technology, pension pedigree
The AXA – Standard Life deal is a story of two businesses that logically ought to come together. AXA was looking for a new owner and the business fits well with Standard Life. They share a common back-end technology supplier, a life insurance company heritage and strong pension books. Integration is never easy but these factors should make it easier. (Click here for data on AUA of the combined entity and our comment to the press on the day of the announcement.)
Standard Life should be able to find economies of scale in the back end (accounting and settlement). We think the big challenges in putting these two businesses together are going to be on price and service.
The following quote from an Elevate customer we spoke to this week sums up Standard Life’s challenge: “I’m a positive chap, so if the functionality, charges and service stays the same, then I can’t see any problems with it.”
Good service costs money. Elevate was losing money precisely because of the high cost of delivering top-notch service and we expect to see changes.
For example, Elevate hand-holds advisers through the onboarding process. They have an implementation team that visit adviser offices and sit with IFAs and their staff to show them how to use the platform. There is an online webex service that complements the face-to-face consultation. This is a nice service – but it’s expensive, especially where business is spread over many advisers often with relatively few and small accounts.
Standard Life is perceived as expensive and Elevate is good value. This week we spoke with a few advisers who use Elevate. Importantly, none said they plan to move assets away immediately. But they will look at alternatives. As one adviser told us: “before the regulatory approval comes in we will be doing quite a lot of homework on the other platforms.” Cost is an important factor in platform selection.
Aegon-BlackRock: back-end technology and customers
The Aegon-BlackRock deal (the Scots were busy this week!) is another example of a deal that makes logical sense. BlackRock’s core business is asset management – not administering assets. Acquiring BlackRock’s DC business gives Aegon 300,000 customers to put into its horizontally integrated Aegon Retirement Choices (ARC) platform.
Aegon has a compelling horizontally integrated business with a single platform serving workplace, retail and D2C. After significant investment on the back and front end, it now needs scale. The acquisition of BlackRock’s bank of over 300,000 customers gives them a nice pool to bring into the funnel.
DC assets are generally sticky and should stay on platform longer. There is also the opportunity to attract a larger share of wallet from these customers with a compelling D2C proposition.
What smart consolidations look like
Both deals make good sense but will not open the floodgates to consolidation for the sake of size. The reason is that there are very few such logical combinations.
What other potential deals do we see on the horizon?
We expect (and hope) Cofunds will find a good home. Many in the industry expect that Aegon will buy the business – and they still might, though the BlackRock integration could be a major distraction from other deals.
We also think that Transact and Nucleus would make a good pair and would strengthen their respective positions among independent financial advisers. Both businesses are growing and attract a similar client base. The cultural differences that would prevent many other buyers from integrating either business don’t exist in a pair-up.
We are also watching smaller players under £10bn in AUA (in particular Novia). Will these businesses push forward as independents or get swallowed by a DFM or fund manager vying for vertical integration?
While these deals are sensible for buyer and seller, they do create work for their adviser customers. But it’s the right thing for the market.