Recognising risks in the platform market
- Advisers disagree that M&A is always ‘a good thing for consumers’.
- 47% of advisers think that a platform could fail in the next 3 years.
- Cash deposits and annuities are top of advisers’ platform wish-lists.
Are advisers concerned about risks in the platform market?
M&A has been a prominent feature of the advice market in recent years as has the growing share of private equity-owned firms. But, do advisers think M&A is a good thing for consumers? 52% of advisers disagree that ‘consolidation and M&A in the advice industry is a good thing for consumers’ (21% agree it is, 27% neutral).
So, we asked advisers specifically whether they are worried about the growing share of the platform market owned by private equity. Advisers are split: 37% are concerned, 43% are on the fence and 20% are unconcerned. Given the 3-5 year time horizon typical of private equity investors, we may see sales in future that could have consequences for advisers if client assets have to be migrated. And, we know that advisers are leery of any potential disruption to client service.
Is M&A in the advice industry a good thing for consumers?
Are you concerned about the growing share of the platform market owned by private equity?
Advisers are also split almost evenly on whether the platform market is oversupplied: 40% believe that it is, while 39% disagree (22% unsure). This split might be characterised figuratively between those who think the current economics are unsustainable and those who believe competition is always a good thing.
These balanced results reflect the fact that times have been relatively good for platforms thanks to buoyant stock markets, and, as Warren Buffet said, it is only ‘when the tide goes out, we find out who has been swimming naked.’ With that in mind, it could be interesting to see how platforms and their owners, which have varying degrees of leverage and exposure to risk assets, navigate a more difficult market environment if it comes to pass.
When we asked consumers whether they were concerned about an investment platform they use failing, 41% of advised and 40% of non-advised consumers reported that they are concerned. But how likely is such an event? Well, 47% of advisers believe that it is likely to some degree (38% quite likely and 9% very likely) that a platform fails in the next 3 years, (27% think it is unlikely; 19% are neutral). Advisers at larger firms believe it is more likely than those at smaller firms.
Interestingly, the 51% proportion of advisers that say they have client money protection strategies in place beyond the 85K limit offered by the Financial Services Compensation Scheme (FSCS) is eerily similar to the 47% concerned about a platform failure. Still, advised consumers are again better off than unadvised on this measure, with 74% of advised consumers reporting they have strategies in place compared to only 60% of non-advised consumers.
Consumers: how concerned are you about a platform you use failing?
Advisers: how likely is it a platform fails within the next 3 years?
Shifting adviser views on platform due diligence
Has the FCA’s Consumer Duty and the need to consider a wider range of foreseeable harms throughout the distribution chain put a different lens on platform due diligence reviews? Service is still, unsurprisingly, the top attribute, but there does seem to be an increased focus on value for money, which scores alongside price.
Since Consumer Duty, which of the following do you attach most significance to in platform due diligence reviews (pick two)?
Financial strength also scores highly, surprisingly outscoring digital functionality, which advisers may now see as more of a level playing field across the leading platforms. 41% of advisers report that they would exclude a platform from their shortlist if it has a ‘B minus’ financial strength rating or lower.
And, financial strength is clearly something that advisers are discussing with clients since a firm 62% majority of advised consumers know the rating of their platform/provider versus only 35% of non-advised consumers.
In their Retirement Income Review, the FCA reminded advisers that ‘one size does not fit all’ when it comes to platform due diligence and alternatives should be considered at retirement. We found that a 72% majority of advisers carry out platform due diligence reviews every 6 or 12 months, while 12% do so based on changes in requirements. However, the FCA may be more interested in the 10% of advisers that reported they do not carry out platform due diligence reviews.
What do advisers want to see on Platform roadmaps?
Advisers are keen to see platforms build out new products and services so that they become a one-stop shop for investing. When we asked advisers what was on their wish-list of platform additions, the top answers were cash fixed term deposits (65%) and annuities (44%).
What services would you like to see from platforms that they don’t have today?
An advised portfolio is (by definition) an intermediated experience for clients, with reports produced and sent to clients at set times. In finance, personalised digital engagement is becoming the default however and advice is not immune. 81% of advisers believe that there will be a growing demand from clients for personalised digital engagement. Perhaps unsurprisingly, this proportion rises to 98% among younger advisers and falls to 72% for advisers over 45.
While some advice firms have built out their own client portals, our survey reveals there is significant scope for this trend to grow. 82% of advised consumers told us they would like a personal digital app or portal to check on their advised portfolio. Only 7% of those surveyed have this already. Furthermore, 42% of non-advised consumers told us that they would be more likely to seek advice if a personalised digital portal was part of the offer. A healthy proportion of advisers are also comfortable with platforms taking the lead, by providing outsourced digital engagement (personalised client reporting) to their clients, with 41% of advisers seeing that as an opportunity and only 16% as a threat (44% neutral).
The fact that nearly half of advisers believe it is likely we could see a platform fail in the next three years is a standout result from this survey. And given that probability, it’s encouraging to see the importance that advisers are now placing on financial strength in their due diligence. The consideration of a platform’s financial strength is not confined to an assessment of foreseeable harms to protect client money. It is also essential to consider whether the platform has the investment power to fund future innovations, such as fixed term deposits and personalised client digital portals, that advisers and their clients are telling us they are looking for.
