False Profit

Let's cut to the chase here. This article is chiefly about not being seduced by headlines that prophesise the future state of the platform market by looking at a single financial metric – such as profit & loss – in isolation. Profit. Prophet. See? SEE! Sorry.

First, a disclaimer. There has been a significant industry focus over the past few years on the profit and loss (P&L) activity of advised platforms. And we understand this. Platforms, once industry disrupter, are now firmly the incumbent. And with that disruption came (sometimes extraordinary) bills for technology installations and upgrades, generating understandable headlines.

I'm also not arguing that profit and loss isn't an important element of financial assessment. Far from it. Any business that posts persistent losses is a cause for concern on some level. But, and this is the important bit, we firmly believe that an earnest comparison of P&L activity in isolation can be a very crude measurement, and that using it as the only financial metric on which to base a rating or choice of platform isn't sophisticated enough.

Different strokes

Success in life means different things to different people and that certainly applies to the range of platforms in the adviser space. The peer group that we look at is made up of a diverse range of organisations, each with different success factors. And when assessing their financial performance, here's some of the critical factors that I reckon you need to get to grips with.

  • USE COMPANIES HOUSE WITH CAUTION: Some platforms are (relatively) straightforward entities but others are a different beast, doing awkwardly awkward things like reporting pension assets via a different set of accounts to other business (the likes of Old Mutual Wealth and Aviva)
  • ASSET ARM: does the platform have an asset manager sister company within the same group? i.e. does the financial performance of the wider entity benefit from monies flowing to an in-house range?
  • MULTI-CHANNEL: does the platform hold assets relating to other markets such as D2C/workplace/institutional or does it distribute purely through the individual retail advice channel?
  • ADVICE: does the platform/parent company own its own advice channels (such as Standard Life Aberdeen (1825) or Old Mutual Wealth (Intrinsic) or hold assets from restricted/strategic/white label deals (Succession on IFDL and Openwork on Zurich for example).
  • MEET THE PARENTS: is the platform part of a wider organisation, such as Zurich Intermediary Platform, or is it a stand-alone business?

If you start to look at the platform players through this lens then a different picture starts to emerge. Let's look at a few examples in more detail.

Nucleus: the platform is the main commercial entity. It distributes solely through financial advisers and is yet to get into asset management manufacturing or owning a slice of the advice chain. You could make an argument that an element of vertical integration-lite is at play, given much of the shareholding is held by Nucleus-using advisers. But that's probably just us being a bit awkward. Regardless of that, you can pretty much boil the success of Nucleus in its current guise down to one sentence - attracting sustainable advised business that will in turn generate revenue for Nucleus from platform charges.

Let's pop down to Bath and have a look at Ascentric – which in many ways is similar to Nucleus in terms of its centre of gravity, being an independent, wrapper and investment agnostic platform. Assessing its financial outlook is more nuanced though. Firstly, it is a marketing brand of Investment Funds Direct LTD (IFDL) and one must be mindful of other assets within the IFDL umbrella (such as the Succession book) that is reported via the IFDL entity. And there's also the small matter of Ma and Pa Pelican, with the wider Royal London fraternity being more than capable of absorbing recent Ascentric re-platforming costs.

Lastly, let's have a gander at Standard Life Wrap (SLW): SLW is just one entity within the wider Standard Life Aberdeen group, which contains two other platforms (greedy). Firstly, a large slice of assets on the platform sits within Standard Life Investments funds. Secondly, the group also owns the 1825 advice network, which mandates usage of the Standard Life Wrap. So, what of the success of SLW? Like Nucleus, it's main revenue generator is core platform charges but there's clearly a lot more at play in the wider context, including the Phoenix deal, finer details of which may well have emerged by the time you read this.

Skittling through the rest of this list and you'll soon find that few platforms have the same set of comparators. Once you introduce the various other factors that define success for a platform, the water quickly gets muddy.

Well, this is all very intellectually gratifying Steve but what are the practicalities?

OK, sorry. Throughout the due diligence and platform selection exercises that we carry out for advisers, we stress two golden rules:

  • Understand your own priorities when assessing providers.
  • Ask meaningful questions.

That second one is particularly pertinent. We've joked about this in a previous edition but it's worth repeating here. If you ask twenty platforms, "Are you committed to the UK market?" then what are you going to do with the inevitable binary results?

Instead, when assessing platform performance from a financial perspective, we suggest looking at a series of data points:

  • Ownership structure
  • % of new business that platform contributes to
  • Scale (AUA)
  • The financial strength, including profit/(loss), of the specific platform business
  • If relevant – the financial strength, including profit/(loss), of the group in which the platform sits
  • To what degree the platform either subsidises, or is subsidised by, other business units in its group
  • New business momentum (net sales figures)
  • Capital adequacy
  • Yield on assets
  • Planned development spend

We find attributing your own level of importance to each aspect and rating the responses accordingly a useful exercise. The strength or otherwise of the objective measures will naturally influence the answer to the far more subjective issue of how well the business is doing and how committed to the market it's going to be. And how well placed it is to keep investing and stay ahead, or at least in line with, what the market expects from a platform.

And then it's up to you to take that information and make an informed and balanced assessment.

That's our view. We'd love to hear yours.

Are you committed to the UK market?

Visit www.langcatfinancial.co.uk for more from Steve and the rest of the lang cats.