Today, I’m off to Luxembourg to speak at the International Transfer Agency Summit (ITAS)! Someone in their twisted mind decided that it’s a good idea to put me on a panel discussion on whether fund managers should get into the direct platform business. Luckily for them, this is an area we discussed extensively in our recent Economics of Direct Platform and Robo Advice Report.
Thanks to the RDR and FCA platform payments regulations (PS 13/1), the influence of asset managers over distribution has been significantly curtailed. Accordingly, many asset managers are considering building their own direct platforms or even robo-advice propositions. Even the banks – Barclays, RBS and Santander are reported to be eyeing robo-advice launches.
Yet, when you look closely at the marketplace right now, we don’t think that going down the direct-to-consumer route is viable for the vast majority of asset managers. There are a few exceptions. Here’s why;
The increasing inter-mediation we have seen in the last few years means that most asset managers have had little or no direct relationship with retail investors for many years. They have ‘outsourced’ client services to advisers, platforms and pension providers. Many of them don’t even know who the end investors in their own funds are and haven’t engaged with investors for many years. So they simply lack the culture of speaking in the language ordinary people understand.
While some asset managers are getting rather excited about the prospect of building their own direct platforms, those who have already gone on that journey are going in the opposite direction:
- In June 2015, Hargreaves Lansdown acquired £370 million of assets from JPM WealthManager+ in a deal that saw 7,000 clients ( 6% of JPM direct clients) with non-JPM funds transferred over to HL in September 2015. JPM ceased offering equities and non-JPM investments to direct clients as well as the JPM SIPP and Cash ISA. (More on this later)
- In July 2015, Jupiter handed over its £60 million investment trust savings and ISA businesses to Hargreaves Lansdown to administer, in a deal for an undisclosed sum. Jupiter withdrew from administering its retail investment trust savings and ISA schemes at the end of November.
Open Architecture or Not?
One important issue for asset managers considering a direct platform proposition is whether the platform’s purpose is to promote their own funds exclusively, or whether it is a whole-of-market proposition competing with existing players. This decision is harder than it sounds and asset managers eyeing the direct market should probably learn from JPM’s recent experience in the UK platform market, which is regarded as the most radical platform play from a fund manager in recent years. In 2011, JPM attempted to take on the direct platform market and revamped its WealthManager+ platform,powered by FNZ, which was originally built for the asset manager’s existing direct clients. The company expanded its offering by giving access to some 800 funds and ETFs from 30 third-party asset managers, alongside it own investment trust. Nearly 3 years later, JPM WealthManager+ axed access to third party funds ‘because most clients who use Wealth Manager+ want to access JPM products’ with only around 2 per cent of clients holding third party funds.
The point here is that investors wanting to access whole-of market funds are likely to do so through independent platforms such as HL, TD, BestInvest and other. And any asset manager eying an open-architecture platform will be in direct competition with existing players and even advisers!
There may be room in the market for a highly differentiated but simplified platform for novice investors, offering access to a limited number of ‘best of breed’ funds. Not only does this narrow down the option for investors, but operating costs for the platform are likely to be much lower. This is what Vanguard is trying to do, but probably not a viable proposition for most asset manager. The index fund behemoth is in the process of building a direct platform for investors who want to hold its funds. This will be a lot cheaper for the investor than accessing the funds through open-architecture platforms. This proposition clearly appeals to cost-conscious investors, who typically use Vanguard funds in the first place.
Profit maker or loss leader?
The cost of client acquisition is the curse of direct platform business, and with intense price pressure in the marketplace right now, it’s hard to see how new player can compete on price and make a decent profit. Off course asset manager might take the view that the cost of building and operating a platform is simply a distribution cost, but this will put even more pressure on their margins, which is what many of them are trying to avoid. This puts many asset managers between a rock and a hard place.
Accordingly, cashing in on the direct platform requires a significant culture shift that most asset managers are simply incapable of making. Added to that, asset managers face other significant regulatory pressures such as MiFID II and the FCA review of the sector. We sense they don’t have the bandwidth to have a go at direct platform business right now.
Take a look at our new report of the Economics of Direct Platforms & Robo Advice, which looks at looks at trends in the financial performance and profitability of UK direct-to-consumer platforms over the last four years.