Cicero Policy Briefer

Issue 15, August 2007

Platforms for the People

By Holly Mackay, CEO, HM Consulting

To date in the UK, fund supermarkets and wrap1 platforms have tended to be targeted at high net worth (HNW) individuals who use the services of an IFA. Conservative opinions put the current UK industry at some £60 billion, but this has grown exponentially over the last 18 months. Estimates put assets under administration at only some £20 billion at the end of 2005. Consequently, the industry is buzzing with optimistic assessments for wraps and platforms.

Google ‘wrap’ back in 2003 and only the ‘Waste Action Resources Program’ sprang onto your screen. Now, almost every financial services conference offers despondent life insurance companies a little pick-me-up at the end of the day, with an upbeat presentation on how wrap will bolster their dwindling manufacturing revenues and provide purpose and a role for the 21st century. The FSA has, this year, accelerated its response to this fast-emerging sector, by publishing a discussion paper on platforms in conjunction with, and in a supporting and complementary role to, their critical Retail Distribution Review.

Yet we are still only seeing the tip of the iceberg. The global experience is that the generic fund platform can offer solutions beyond the portfolio administration service built by life companies or asset managers and used by IFAs.

In Australia, platforms rocketed to the fore some 10 years ago, driven by Paul Keating’s compulsory retirement savings. Unions built at-cost platforms to manage their members’ superannuation contributions, with default options linked to model portfolios of funds. The typical administration costs for such options are about $AUD1.25 per week, which are paid in addition to the underlying institutional asset manager charges. The latest development in the ‘super’ world is the launch of the Government’s Future Fund – a fund of some $50 billion (funded in part by the sale of the final tranche of Telstra) which has been launched to accumulate sufficient assets to offset the government’s unfunded superannuation liability by 2020. The underlying mutual funds will be managed using a platform.

Closer to the customer, retail banks have adopted platforms to provide investment solutions – the Commonwealth Bank of Australia has developed First Choice, which is a simple fund platform delivered to customers via both IFAs and branch advisers.

In the US markets, section 401k of the Internal Revenue Code authorised a new type of defined contribution retirement savings plan in 1978 that allowed for the employee to make pre-tax contributions to the plan. Now most 401k plans use platforms to provide customers with access to typically some 8-20 investment options – platforms are at the core of the US pensions market.

Finally, in Europe, platforms are commonly used primarily by retail banks, to package investment solutions for their customers. Grupo Santander, San Paolo, BNP Paribas and Crédit Agricole all own proprietary fund platforms which manage both in-house product and third-party fund distribution and support the delivery of investment products from the world’s leading managers to their retail banking customers. With continued European cross-border acquisition and these platform giants (some of whom manage up to €40 billion in Europe) keen to move into the UK market, the future looks interesting indeed. A European bank with platform capability is highly unlikely to make a play in the UK market aimed at IFAs alone, if at all.

To date, platforms in the UK have been discussed as the preserve of the HNW individual customer, yet their implications are much broader. They can provide the backbone of defined contributions pension plans, support asset consultants to deliver investments as well as advise on them; moreover, they could (and should) also play a role in the delivery of Generic Advice, and it is surely just a matter of time before banks bite the bullet and get serious about building or acquiring platforms to support their mass affluent investment and savings propositions.

With most leading life insurance companies scrambling to build a wrap to sell to unaligned and sometimes sceptical IFAs, there is huge potential to develop platforms for other sectors of the retail market that has not yet been adequately addressed in the UK. Watch this space as the platform revolution continues.

1. Definitions of wrap platforms vary according to the proposition but they essentially pull together investments from multiple providers across differing tax wrappers and provide a single view of assets and single point of access for the customer.

Holly Mackay is the CEO of HM Consulting and can be contacted here.

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