2015 to be the year for a major shake-up in the use of fund platforms

2015 looks set for a shake-up in platform use, adviser market polarisation and a good year for passives


Tis the season for speculation! My final piece of 2014 is a digest of tentative predictions based on both data and gut feel.

We will likely see a significant shake-up of the platform market in 2015 as the conclusion of the sunset clause for legacy business draws closer. By April 2016, all investments on-platform will be – to use the sometimes unhelpful but most widely understood terminology – “clean”. As financial advisers decide how best to conduct the share class conversion exercise, some may also find the moment apt for re-thinking their platform strategy. 

The Platforum’s Q4 research into the adviser platform market gives a nod to this potential shake-up. The chart shows responses to the question: “Are there any redundant or ‘legacy’ platforms within your business that you plan to place minimal or zero new clients on?” The three largest adviser platforms in the market typically suffer worst by this measure of sentiment.

Conversely when we ask more broadly which platforms advisers would consider using for writing new business, there is a significant proportion of non-users who would entertain the idea of adopting at least one of the Big Three.

Without delving into the data too deeply on this occasion, the overriding message seems clear: the mood is ripe for big changes in platform use amongst advisers in the next 12 months.

Moreover, shifts in platform use will likely be a product of advisers continuing to restructure their investment propositions. A small advisory firm continuing to pick funds in-house to date may well re-evaluate, decide it is best to outsource the investment piece and switch to a platform that provides access to a suitable discretionary fund manager.

Seven Investment Management and Parmenion are good examples of platforms that often form an integral part of users’ centralised investment proposition. Many users of Seven IM embrace its passive multi-asset funds and model portfolios in addition to the platform engine; the same is true of Parmenion and its risk-rated models.

Equally, some outsourced solutions – be they discretionary model portfolios or risk profiling and asset allocation systems – may start to look not so hot in the light of the FCA’s thematic review into retail advice due diligence (expected to drop in H1 2015). A chunk of hitherto advocates may then wish to re-jig their propositions, which would impact on their platform due diligence.

Thinking about the nature of business being written on platforms, the general feeling is that open architecture will continue to lose ground as managed solutions and vertical integration in the advised space both become more prevalent, and execution-only platforms funnel assets with favoured funds list and their own investment solutions. Yet we would accuse those pronouncing, “Open architecture is dead!” of hyperbole.

More likely is that we’ll see polarisation in the market. Some IFAs will make it their business to remain whole-of-market and wedded to a platform with a more comprehensive range of investments like Transact or Ascentric. At the other end of the scale, we anticipate that more providers will follow Old Mutual Wealth’s lead, promoting a set of investment solutions and buying up distribution.

Having visibility on the fund managers booking the most new business via platforms, I feel reasonably confident betting on passive funds gaining greater market share in the retail arena in 2015. Vanguard makes the top five for third quarter net sales on all adviser platforms that supply us with this data. Smart beta house Dimensional also receives a couple of mentions in this respect. One platform reported third quarter net sales comprising 35 per cent passive funds. On execution-only platforms, price slashes on passive funds make the case for these investments stronger for many consumers.

Incredibly for all the noise made about the lack of efficacy of active management and the cost involved, passives struggled to gain a bigger piece of the pie this year. I believe this is partly owing to a mentality that proving oneself as a sophisticated fund selector means picking active funds. However the net sales data suggests that the tide is slowly turning.

I would not necessarily extend this view to include the institutional world, where one day you hear that pension funds are considering moving more money into passives to rein in costs, and another that pension fund managers have their eyes locked on hedge funds and real estate to make higher levels of return. Go figure.

So in short, Santa has in his sack considerable changes in platform use, polarisation in the adviser market between the truly independents and the vertically-integrated firms, and a good year ahead for passives. Enjoy the festive period, and drown out the new Band Aid noise pollution with “Fairytale of New York” if you can.

Key takeaway The use of platforms in 2015 looks set for a major shake-up as advisers continue to restructure their investment propositions.