IF SIMPLICITY is the ultimate sophistication, it may help to explain how, in just under two decades, investment platforms have become the predominant channel for the distribution of investment products to consumers.
Straightforwardness is at the heart of the investment platform concept, but it is their ease of use that has helped fuel the explosion in the size of the market. This has given those in the supply chain greater capability than ever to focus on attracting new clients. Recent pension freedoms have also added rocket fuel to the mix.
The combined result is a five-fold increase in the size of the investment platform market in just eight years, with assets under administration increasing from £108 billion in 2008 to £592bn in 2016. But when the industry reaches such scale, seed investors naturally begin to consider if conditions are right for an exit. The investment platforms industry is no different.
Leading the way is Transact, whose parent company IntegraFin Holdings was admitted to the London Stock Exchange at the beginning of the month. AJ Bell has appointed a broker to explore a listing by the end of 2018 and there has also been talk about whether Nucleus will take the plunge.
These are very well run and highly profitable platforms with a compelling story to tell around helping pension savers and their advisers negotiate the complexities of pensions freedoms. This, and being new to the market, is likely to drive high valuations for these companies.
It is, however, possible that an investment platform market study from the Financial Conduct Authority (FCA), which will publish an interim report in the summer, is a significant motivating factor here. The study intends to identify the causes of any competition issues in the market, such as consumers not being sufficiently engaged with charges, and recommend measures to improve competition between platforms.
Last year the FCA conducted a similar study of the asset management industry and this may well be a concern to those with financial interests in an investment platform, given the generally damning nature of its findings.
Considering that the mere announcement of the platform market study knocked almost three per cent off Hargreaves Lansdown’s share price, there could well be a significant effect on share prices if the regulator finds that radical reforms are required to promote competition for consumers.
That said, there are significant differences between the investment platform and asset management industries. While asset managers make handsome profits regardless of market conditions or investment performance, around half of all platforms operate at a loss, mainly due to being unable to keep spiralling technology costs under control.
Regulatory scrutiny does not, therefore, sound like the catalyst for a turnaround in the fortunes of those already operating on wafer-thin margins.
While investment platforms are here to stay, there are valid questions around the long-term sustainability of some providers, as well as how further regulation could impact company valuations.
The waters are somewhat muddied by firms operating a vertically integrated model. This sounds very grand but basically means that some companies operating a platform also offer financial products and associated services such as financial advice or investment management services. Their platform is essentially a vehicle that directs customers to use these other services.
How long the regulator will continue to be comfortable with such arrangements remains to be seen.
Most importantly from a consumer’s perspective, the fact the FCA is taking effective competition seriously can only be good news.
The end goal is clear – consumers are empowered as well as informed, while firms strive to win custom based on service, quality, price and innovation.
Lee Halpin is technical manager at @sipp.
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