After two successive quarters of growth, adviser platform operators can climb out of their bunkers, look around and hope the worst might be over.
They have emerged from a rugged 2022, with its volatile post-pandemic stock markets, and now find themselves in a rather changed commercial environment compared with that of two or more years ago.
Much of the landscape of the adviser market and the platforms that serve them looks superficially similar to pre-pandemic times and most of the main players are still out there. But below the surface, the tectonic plates have been moving.
Platforms have seen an upturn in their fortunes but the road ahead looks more than a little rocky
In particular, we have noticed business outflows in the platform market have been rising over the last few years, with a widening gap between gross and net sales. In the first quarter of 2023, this trend seems to have accelerated, as shown in the graph below.
So, what’s driving these trends? We see several powerful forces at work.
Consolidators have been enjoying a buying fest for several years and many of them are increasingly moving from pure buying mode to the trickier stage of integrating their purchases.
Layers of management burgeon, systems break down and many successful advisers grow grumpy and leave for pastures new
They have discovered they can derive few, if any, economies of scale from just gathering together a bunch of disparate subscale firms and calling them a business.
In fact, that turns out to be a rapid route to boosting downside risk and reducing aggregate profitability. Layers of management burgeon, systems break down and many of their most successful advisers grow grumpy and leave for pastures new.
Consolidation only works if the consolidators actually consolidate – raising advice standards, rationalising systems, exploiting buying power and cutting down management costs. For many of them, that process includes rationalising the number of platforms they use and possibly even bringing them in-house.
Advisers have been telling us for years they have wanted to use fewer platforms but while they have mostly focused their new business flows on their favoured two or three platforms, they have tended to leave the rest of their legacy business undisturbed. Now some of the consolidators are taking a rather more proactive approach and are rationalising platform use across the board.
Even outside the consolidators, we see movement. Advisers are increasingly frustrated with some of the platforms they use and are showing more interest in using fewer, favoured names. Platforms’ market shares have remained broadly static over the last decade, with ‘legacy’ platforms buoyed by advisers’ reluctance to transfer assets away. This might be starting to shift.
Another reason for higher outflows, especially over the last quarter, has been the return of cash as an attractive home for money. Advisers have been telling us some of their clients are taking money out of investments and allocating it to cash. Recent volatility has fazed them.
Advisers are increasingly frustrated with the platforms they use and are showing more interest in using fewer, favoured names
Deposit rates upwards of 4% seem far more attractive, especially when paired with guaranteed nominal capital values and the prospect of even more as interest rates look set to climb further.
Advisers have been questioning the attractions for bond funds for years, as interest rates fell ever lower and capital values soared. Year after year, their pessimism was disappointed and bonds continued to climb.
But in 2022, the long-awaited bond collapse finally arrived with much attendant scepticism about conventional 60:40 equity bond portfolios. For many investors and advisers, cash has now overtaken bonds as the best counterbalance for equities and yet everyone knows platforms are mostly not great places to hold cash.
Platforms should look to their laurels. They have seen an upturn in their fortunes in the last half year but the road ahead looks more than a little rocky.
George Shore is associate analyst at Platforum
