The investment platform sector is in a state of transition with providers facing a number of challenges including digital disruption, new entrants, pressures on fees and charges and regulation. And with a new generation of automated, cost-conscious investors entering the fray, the sector is set for a significant shakeup.
On the regulatory front the FCA is carrying out its platforms market study which will consider whether platforms offer good value for money and examine the rise of vertically-integrated firms. The regulator has also raised concerns about re-platforming projects and the potential for consumer detriment.
Meanwhile, the sector has seen the coming to market of tech-driven players offering various robo-advice and D2C propositions with cheap pricing models. This, in part, has been fuelled by the Financial Advice Market Review’s call for automated, cost-effective solutions to help close the advice gap. At the same time, we have seen the rise of the actively-engaged mobile investor amid the ascendancy of investment apps and a shift toward DIY investing. Our research shows investors are increasingly opting to make independent investment decisions aided by online research, media resources and other information sources.
Vanguard is one such player to take advantage of the digitally-fuelled drive to automated investing. The US passive fund giant’s new D2C platform proposition offers cheaper fees than rivals and has proved popular with investors since launching in May. The platform’s pricing model — it charges just 0.15% for the first £250,000 — represents a real threat to established D2C platforms such as Hargreaves Lansdown.
On the adviser side, new entrants including Hubwise and Embark Group are looking to make a splash with competitive pricing models and stripped-down propositions.
As some of the more established platforms go through expensive and time-consuming re-platforming projects, the more nimble-footed new entrants boast the latest technologies and functionalities. These offerings may have a more limited product range — Vanguard customers only have access to the company’s own funds — but this is a core part of their DNA. They want to make investing more accessible and less complicated. They are looking to tap into the desires of a growing base of tech-savvy consumers who want to execute their own investment strategies using cheap and straightforward propositions. Rather than bells and whistles, funky tools and access to alternative investments, a new generation of investors crave simplicity and functionality. There seems to be a yearning for a back-to-basics approach in platform land.
The coming to market of these low-cost propositions will undoubtedly put pressure on more established players to cut fees. The sector stands on the verge of a price war and this will benefit consumers and help democratise financial services.
The importance that investors attach to cost was underlined in CoreData’s recent study of D2C platforms offering stocks and shares ISAs. The study showed that while investors think platforms are providing high levels of security, reliability and customer service, there is room for improvement when it comes to fees and charges. The average investor rating for fees and charges was slightly below ‘good’.
And the desire for cost-effective, functional propositions is not limited to autonomous investors. Our Investment Platforms report showed platform and fund manager charges are the most important features of a platform for advisers, followed by simplicity and ease of use. And with service and functionality emerging as the top two satisfaction drivers on adviser platforms, it is now imperative that platforms do what they say on the tin.
The Investment Platforms report, which surveyed nearly 1,000 financial advisers, also underscored adviser demand for a basic but core range of investment options. The study revealed that annuities and income drawdown are the products advisers most want on platforms. Income drawdown, in particular, has entered the mainstream after the boost provided by pension freedoms.
The clamouring for more streamlined and simple propositions is not just indicative of changing investor and adviser sentiment but a product of a fractured market that has splintered into a complex array of sub-divisions. The market has evolved to such a degree that the very term platform looks outdated. Companies that fall under the platform umbrella are now part of a diverse and varied group of business models, including adviser platforms, D2C platforms, online brokers, banks, asset managers and robo-advice propositions. Some platforms are large vertically-integrated businesses owned by asset managers or insurance companies, others independent entities and others part of the new wave of fintech propositions. And all of these different sub-groups face their own set of challenges.
The services provided by platforms vary widely from those offering a full suite of investments, research tools and telephone guidance to those with a limited range of investments and tools and minimal or no customer service. The ability to buy individual shares, investment trusts and ETFs all vary according to provider.
With so many different models to choose from and so many different criteria to consider, investors and advisers alike face a bewildering task when it comes to platform selection.
But despite the frenzied competition and imminent price war, our research suggests the platform market is set for further growth. About 15% of advisers we surveyed say they are likely to add at least one more platform to their business over the next 12 months — up from about 14% in 2016 and 8% in 2015.
The imminent expansion is expected to be accompanied by a rise in business volumes, with over three in 10 advisers telling us they plan to increase business on their main platform over the next 12 months.
So while the task of achieving profitability and scale has become that much harder, there are rewards on offer for those propositions that meet the needs of advisers and investors. And our research indicates those platforms carving out targeted and streamlined propositions with low fees and simple functionality will be best placed to survive and thrive. In platform land, it seems that less could be more.
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