Platform chiefs and market watchers are braced for a new round of challenges in 2023, Laura Miller writes…
Everything from technology to regulation to pricing is set to change next year for platforms. So too, many hope, will the direction of assets under management, after steep falls in 2022. This year has been difficult. Many are expecting something similar next year. There are, however, some bright spots on the horizon.
A quick but grim recap. Assets under management (AUM) on UK platforms fell in every quarter in 2022, from £890.7bn in Q1, to £838.4bn in Q2, to the latest figures for Q3 showing £825.3bn, according to Fundscape data. In Q3 gross sales fell to £26bn, the lowest since the fourth quarter of 2016, and net sales plummeted to just £4.4bn — the lowest industry net sales in over a decade.
The cost-of-living crisis, rampant inflation, the uncertain economic outlook and political instability had a huge negative impact on investor confidence, as Fundscape pointed out alongside its figures. Worried investors fled to cash.
Fear-inducing factors look set to continue in 2023, with the same resulting outcomes.
Quilter commercial and propositions director David Tiller says: "We are unlikely to see the macroeconomic picture bounce back in 2023 quickly. While inflation will be slowing and markets hopefully less volatile, the cost-of-living crisis will have fully taken hold and the UK economy will be in recession."
Platforms' task, along with advisers, will be to remind investors of the advantages of long term investment, Tiller said, quoting Warren Buffett's old adage, "to be ‘fearful when others are greedy, and greedy when others are fearful'".
Winning platforms will be those that "ultimately make it easiest for customers to engage and interact with their finances and give them multiple ways to facilitate this", he adds.
Making platforms easier to navigate falls squarely into the technology ask. Hopes are high the new year will bring long awaited improvements to integration.
Fundment chief executive (CEO) Ola Abdul says 2023 is a "significant year" for platform tech, because advisers appear ready to decide on the technology that will support them in the future.
He says: "The story of technology integration in 2022 and for a few years has been ‘there is a lot of technology out there, and it is not integrated, but it's getting better, and we will get there one day'. That is not going to wash anymore."
Abdul is not alone in wanting more from platform tech in 2023. Financial Technology Research Centre (FTRC) CEO and founder Ian McKenna branded most platform technology behaviour in 2022 "prehistoric".
His exception was Fidelity Adviser Services with its Conquest Financial Planning partnership. Calling it a "real coup" for 2022, McKenna says it is a model for the future, in that it "supports advisers' whole business", with an innovative charging model that is fully compliant with indirect benefits rules and that "delivers technology exponentially more advanced than available from traditional suppliers".
For McKenna, Conquest shows what is expected of platforms in 2023.
"It's what the rest of the platform market should have been doing, embracing technology and the change it can bring, rather than seeking to constrain it," he explains.
Abdul is similarly impatient for what he sees as essential adaptations. Waiting for an industry body to intervene on integration would be "like forcing people who are driving at 5,000mph to drive at 20mph so they can be aligned with those who are not moving at all", he states.
Instead he argues advisers have to flex their muscles in 2023, as they have significant influence over the future of platforms by the choice in who they work with.
"Advisers can continue using systems that are wired poorly or they can find systems that truly support functional integrations through application programming interfaces," he says.
Advisers are gaining a better understanding of the technology available and how it can support them moving forward, and "they don't need to be technologists to do that", Abdul adds. When they do, he expected them to switch: "Without hesitation, they will press that button".
Private equity (PE) firms have taken a particular interest in adviser platforms over the last couple of years, and this attraction is expected to continue in 2023.
Since 2020 four private equity houses have bought up or taken stakes in six platforms; Anacap invested in Novia, Wealthtime and Amber Financial in 2020; Preservation Capital Partners went into Parmenion in 2021, and Epiris and HPS Investment backed Nucleus and James Hay in 2022.
Platform One CEO Alex Cowan-Sanluis says PE investment and consolidation continue to be major themes, which he expected to continue as the opportunity to consolidate assets for less grows.
He adds: "Reduced market values and dampened expectations of growth will result in cheaper asset purchases for consolidators with sufficient capital, who may see now as one of the better times to acquire."
Private equity firms are in a position to vertically integrate the chain, he added, "so their activity will increase across the board, purchasing IFAs, platforms, self-invested personal pensions, discretionary fund managers (DFMs) and fund managers".
Not everyone sees the logic of private equity interest in the adviser platform market, however. McKenna for one, who labelled it a "puzzling blind spot" on PE firms' part.
He explains: "Most platforms do not make profits currently and it's fairly obvious platform charges and their margins are on a one-way ticket to virtually zero."
Why? Because changes he anticipated in the sector will soon move asset registers and other related functions onto the blockchain.
"We simply will not need platforms as we currently do," McKenna says. By 2030, "maybe sooner", platforms will have gone the way of carbon paper, print film and the Blackberry, according to the FTRC chief, with next generation digital wallets "able to do everything a platform can and much, much more".
The smart platform players are already quietly building chain-based services that can deliver platform type services for a fraction of the cost, he adds.
As well as inheriting some dire economic themes, another 2022 legacy front and centre in 2023 is Consumer Duty.
July sees the deadline for the implementation of plans for existing products and services to comply with the Consumer Duty, but April is the first major milestone when providers must be able to provide their value assessments to advisers, who can then consider the end-to-end value to the client.
The Lang Cat senior analyst Rich Mayor says the Consumer Duty should drive further clarity around value for money and service propositions.
"We expect that to continue to be a key competitive point of differentiation between platforms - our research consistently finds that service authenticity is a primary driver of adviser satisfaction," he says.
For Tiller, while much work has already been done on getting ready for the Consumer Duty, the two deadlines (April and July 2023) mean there will inevitably be two sprints to the finish line in Q1 and midway through the year.
Platforms "will need to make sure they are in a position to evidence good customer outcomes and be on hand to support advisers in doing the same", he notes.
If executed well the new Consumer Duty could give both advisers and platforms the "opportunity to shout about" the benefits advice and financial planning already bring, he adds. At least, as its repeal was announced on 9 December, no one will have to worry about the packaged retail and insurance-based investment products (PRIIPs) rules anymore, though the Financial Conduct Authority has announced it will be carrying out a review in the new year into what shall replace it.
The Consumer Duty will have another effect in 2023, according to Cowan-Sanluis.
"It will raise questions, and has done already, about fair pricing of funds, their ongoing charges figures, and ongoing advisory charges," he states.
Cowan-Sanluis can see a reduction in fees in both those arenas. This does not, he pointed out, mean the entire market will race to the bottom. More likely, he says, there will be a "bifurcation in the industry", of cheap volume-based servicing and more expensive quality-led servicing for specific client bases.
He adds: "It is the middle ground that will likely shrink." Platforms and DFMs have already lowered fees substantially in the last few years, and there will be an expectation for that to continue.
But, said Cowan-Sanluis, there is only so far firms can go before it becomes "commercially unviable and they hit a floor".
He added: "I think that floor has almost been hit by some players". Large private equity-driven consolidation can afford price drops, however, if it allows them to meet their broader aims.
Cowan-Sanluis says: "[PE-backed] players will be willing to sacrifice earnings before interest, taxes, depreciation, and amortization at a platform level for the sake of distribution into their acquired central investment propositions, and a driver for asset flows into the acquired IFA firms."
The new year will open with the old year's woes as wider economic factors are likely to weigh heavily on at least the first part of 2023.
But from the Consumer Duty to tech innovation, platforms have opportunities to do well. By all accounts advisers will expect that and more.
Platforum research director Richard Bradley said his firm's research showed adviser attitudes towards platforms are maturing.
While platforms have historically been treated like products, recommended to clients individually in a similar way to investment products, "we're now seeing more advisers regarding platforms as services that work for both the client and the adviser," he says.
Bradley's prediction for 2023? Advisers will be choosing platforms "more strategically and choosing to work with fewer", enabling advisers to work more efficiently, but also enabling them to negotiate harder on platform charges. Platforms will have to bring their A-game to next year.
