Malcolm Kerr Independent Consultant

My guess is that building, acquiring, integrating, replacing, migrating and incurring losses in the intermediary platform space has cost players more than £2 billion over the past ten years. And 2022 is likely to see further challenges.

As we know, there are several different platform models. For example:

• Intermediary utilities such as Transact, Nucleus, and Novia. Interestingly these companies have been profitable for many years and have generated substantial capital events for their founders
• Hybrid models that combine intermediary utility with fund distribution such as Quilter and Standard life. It’s challenging to work out how much these businesses make or lose. I suspect the losses exceed the profits across the space by a considerable margin
• Direct to consumer models such as Hargreaves Lansdown and Nutmeg. The former highly profitable in-spite of the Woodford saga. The latter has incurred mind boggling losses, and amazingly the business has been acquired by JP Morgan for a suggested £700m
• All of these business models are price sensitive to some extent. And given that there is over-supply, and a regulator seemingly obsessed with price, it seems that margin pressure will increase and consolidation and migration will continue.

My estimate is that total platform assets are now in excess of one trillion pounds.

What is the future for life insurance companies that don’t do insurance?

More than 50 life companies have come and gone since I joined the industry, along with, I guess, about 150,000 direct sales people. And those companies that are still around don’t do much, or even any, insurance nowadays. What’s more, most outsource their distribution and their investment propositions.  So what is their role in life?  Well the role of Phoenix Assurance and other “closed book consolidators” is clear – use economies of scale, smart financial engineering, and customer retention to provide a decent yield to shareholders. Quilter (Old Mutual, previously Skandia – keep up! ) and Aberdeen Standard (Previously Standard Life) have recently transferred their administration to Phoenix – including my SIPP. It would have been nice to have been informed!

I could go on. But the life companies that interest me are those that still take on risk. I’m thinking L&G, Aviva, and Royal London, plus some of the niche players. And of this bunch it seems to me that Royal London are punching above their weight. Of course they have a platform but I don’t know how central it is to their long term strategy. My guess is that they will sell it in due course. More important, they have excellent protection propositions and are an important player in the pensions and drawdown markets. L&G are also interesting, they have now launched their advice proposition  and I think their brand will resonate positively with the “retirement” market.

The drawdown market, in particular, is massive. And there is scope for imaginative propositions. For example, the Royal London Governed Retirement Income Portfolio  (GRIP) and PruFund. Think risk mitigation if not guarantees. It’s what clients in drawdown need – even if they don’t know it. I just hope the advisers understand these products work!

I think Equity Release to provide income rather than release capital is another opportunity. No coincidence that L&G now have a product.

The Asset Management Market Study, MiFID II and a number of other developments are having a fundamental impact on the retail asset management market

The FCA now require an “All-In” fee which includes estimated transaction costs and which is communicated clearly to investors. Second, they want fund objectives to be spelt out clearly to potential investors and the performance to be compared with those objectives. Third, they are looking to fund managers to demonstrate the value they bring to individual investors. The industry has received some  unwelcome feed-back as clients receive their detailed MiFID statements containing some of this information. Perhaps even more important, some “star” managers have been losing their lustre and it looks like Woodford – the previous brand leader – has caused serious damage to the active manager brand. To cap it all, by the end of 2020, a couple of highly regarded property funds  suspended redemptions due to a lack of liquidity.

The FCA reported some time ago that: “Our evidence suggests that actively managed investments do not outperform their benchmarks after costs and that some active funds offer similar exposure to passive funds, but charge significantly more.” Clearly, the future looks dim for players that cannot demonstrate consistent value. Further consolidation looks inevitable. But if the Standard Life and Aberdeen Asset Management transaction tells us anything, not all consolidation provides benefits to all (or any) of the stakeholders – to say the least!

Interestingly, we are already seeing some asset managers moving into additional sections of the value chain. For example Schroders; who have followed up their investment in Nutmeg, with another investment into distribution and underlying technology investment via Benchmark and the announcement of a joint venture with Lloyds Bank in the wealth management space. Many others are acquiring IFAs or planning to do so. Will these be “marriages of convenience” or marriages of inconvenience? I think most will be the latter!

The demand for professional and experienced financial advice has never been greater than it is today. And, whether or not it is delivered face to face and/or online, somethings seems to be certain.

Demand can only increase for the foreseeable future. Why? Because pension fund “freedom” coupled with pension premium restrictions has created a very complex regulatory environment that is chock full of challenges and opportunities.

There are about 22,000 advisers who are equipped to meet this demand. And this number is unlikely to increase any time soon. So, as demand increases fees will also rise. This is excellent news for the profession. Even better news is that the investable assets in the hands of the aged 50-70 segment is about £1trn. No wonder so many people are trying to buy into these people!

The spanner in the works is the potential DB to DC “scandal”. Because, even where the advice is seen to be satisfactory, a three year bear market will have a very dramatic impact on those well thought through plans. And not all advice is considered satisfactory.  In a statement in January the FCA stated that their recent research suggested that across all products 93% of advice was considered suitable but only 50% was suitable when it related to pensions transfers.

Consolidation within this market will increase for the foreseeable future. Private Equity and institutions will lead the charge and pay more than most firms are worth