“I guess most industries evolve and develop on the fuel of innovation provided by smaller new entrants but surely nowhere can this be truer than in retail financial services, where the real battle is beginning to take shape. A sector ridden with mediocrity, bedevilled by mistrust, blinded by regulation and crippled by legacy thinking, legacy technology and legacy business models in which the incumbents are seriously struggling to get to grips with the environmental changes around them.
“We are about to leave behind a decade that once promised so much. Once the Y2K myth had been dispelled our sector was propelled into the new millennium by the launches of FundsNetwork and Cofunds and the decade wasn’t one year old before they were joined by Transact, the UK’s first wrap platform.
“While the supermarket launches were interesting they were (and have remained) little more than an online extension of what had been happening with packaged products. Essentially a bunch of fund managers paid a life company (and then a supermarket) to distribute their funds.
“I recall being much much more excited by the Transact story. Here was a market-changing business that (by introducing the UK to transparent financial services) offered advisers (and their clients) something truly new. Instead of the adviser proposition being controlled by the product provider, those IFAs able to charge their own service on a transparent basis were suddenly able to take control of their entire business. While it was all beginning to go wrong for the life companies due to capital issues this was a chunky nail in the coffin. Transact (and some of the others that have followed) liberated IFAs in a way that had barely been conceived of before.
“Now, as we stare right into the eyes of 2010 how much has really changed? The life sector (particularly in the platform space) has achieved little more than the destruction of shareholder value. The supermarkets are increasingly seeking to dictate IFA propositions in order to support their own business model and the aggregate assets held on wrap platforms are probably less than 20% of the overall platform space. Yet, there is no need to feel despondent as behind the scenes, the world has turned. The market momentum is unquestionably with the more open, transparent wraps. Nucleus will soon join Transact in being a profitable wrap business and the RDR-catalysed IFA market is only heading in one direction. And perhaps strangely it’s some of the larger organisations that are finding themselves playing catch-up.
“There is much discussion about the sustainability of various platforms but much less about their RDR-readiness. While we have been bored for years now by claims of ‘deep pockets’ and ‘scale’ there has been far too little focus on the underlying business models. For example, I’ve seen a number of sales-related CVs lately and simply cannot believe (and would not countenance) the packages apparently on offer to broker consultants who can bring in £20m of assets each year.
“These old models will need to change as they are utterly (and demonstrably) uneconomic going forward and no-one is going to pay. History is littered with those who can claim to have had a big past but very few in this sector with a big past are going to enjoy a big future if they just keep on doing what they’ve been doing.
“The future is about transparency, consumerism and IFA control. The response to these issues will define the winners and these in turn point to the business model, the technology model, the culture and the distribution model. This is now the battleground for the real platform shakeout. It is no longer anything to do with misleading claims about deep pockets. You (or your shareholders) can have the deepest pockets in the world but if you’re losing £50m every year or need to spend £60m getting ready for RDR there will be some tricky times to come. If you are running an efficient RDR-ready, IFA-aligned model that can demonstrate a path to sustained profitability the world is probably looking a whole lot brighter!”