Platform sell-off: why it's happening and what you should do? Wednesday 23 Sep 2015

Platform sell-off: why it's happening and what you should do?

WHAT IS HAPPENING?

Two deals have been completed this year: in June Caledonia Investments acquired Seven Investment Management (7IM), and in September Aberdeen Asset Management purchased Parmenion.

Last year wrap heavyweight Transact was also up for sale; the intention was there but the plans fell through and now the company is eyeing a potential float.

Strong speculation surrounds the largest platform player in the UK, Cofunds. In June, New Model Adviser® revealed its parent company Legal & General (L&G) had appointed Fenchurch Advisory Services to look for a buyer. Although no deal has been completed, it is understood Sipp and platform provider AJ Belland platform technology provider FNZ have been in talks with L&G about buying the platform.

New Model Adviser® earlier this week also revealed AXA has offered its wrap platform Elevate to a number of private equity firms.  

WHY IS THIS HAPPENING?

The trend is that some life companies no longer view platforms as an integral part of their business. For example, 7IM’s majority shareholders Aegon and Zurich wanted to sell stakes they owned.

Life companies that perhaps came a little bit late to the platform party and have not seen the high returns they were expecting for their hefty investments are looking to cut their losses and stop throwing good money after bad.

Many providers looked to own a platform when it was seen as an essential item, but as it has historically been difficult to post a profit in that market, they are concentrating on their more profitable businesses where they see value for money.

For example, Cofunds made a pre-tax profit of £7.7 million in 2014 with assets under administration of £71.9 billion. By comparison L&G posted a pre-tax profit of £1.2 billion in the same period, making the platform appear relatively insignificant in terms of the whole business.

Independent wrap consultant Stan Kirk said: ‘Platforms for these big life companies generally reach a big size, but do not make enough money.

‘Most of them are profitable, but not profitable enough for shareholders.’

The costs for running a platform stack up, given regulatory and technology update requirements. Can companies justify constant big bills to their shareholders if they are not making a decent return?

Old Mutual, for example, revealed in its half-year results for 2015 that it had paid £250 million so far to outsource its core platform technology to IFDS.

WHO IS BUYING?

So far, the trend has been towards asset managers buying platforms.

This is partly due to the pension reforms, which have given fund groups the chance to tap into a new and ever-growing market.

The main lure here is distribution. A platform would allow asset managers to distribute their own funds at a low cost online to a wide population. Fund groups have successfully scooped the high-net-worth clients, but platforms and the pension freedoms pair together perfectly to bring in the mid-sized clients.

David Ferguson (pictured), chief executive of wrap platform Nucleus, said asset managers had to compete with low-priced tracker funds and were also expected to be completely clear with pricing.

‘I wouldn’t be at all surprised to see more asset manager groups move into the platform sector, which they can do by building their own or buying one,’ he said.

‘They have twin threats from passive funds and fee disclosure from the regulator. Platforms can lower costs.’

WHY ARE FUND GROUPS COMING INTO THE MARKET WHEN LIFE COMPANIES WANT TO LEAVE?

This is partly because fund groups and platforms are more natural bedfellows, as a platform allows an asset manager to take margin on the distribution of their funds, giving it more money to invest back into the platform.

In fact, Standard Life and Old Mutual Wealth have transformed from old-style life company businesses into asset management-based companies as their platforms have grown.

Asset managers also have the benefit of learning from the mistakes of some life companies. Most importantly, they realise it is important to allow platforms to develop on their own.

Alastair Conway (pictured), chief executive of James Hay, said Aberdeen’s acquisition of Parmenion showed asset managers were considering the value of the business itself rather than acquiring for the sake of scale.

‘These businesses are being acquired for what they are rather than as an add-on to a large organisation,’ he said.

‘Organisations can see value in platforms as separate businesses in their own right over the next three years.’

WHAT SHOULD ADVISERS DO?

Do not panic. Speculation alone should not be enough to make a move and, although sales should be something to look at, it should be considered alongside regular due diligence of platform choices depending on various factors.

If an adviser’s platform is snapped up, alongside pricing and poor service, the buyer should be put under the spotlight, including their aims, targets, financial strength and commitment to the market.

If fund groups move to buy platforms, advisers may also be wary of any potential distribution biases that may emerge.