The storage cupboard on the third floor of a marketing agency near Covent Garden feels like a slightly unedifying setting to interview one of the few genuine disrupters in financial services. But that is where David Ferguson and I find ourselves as the outspoken Nucleus chief executive begins tearing strips out of his rivals’ business models.
“The platform industry is a funny market with two bodies of firms: post-millenial start-ups that had little money and are now very profitable, and the legacy industry, which is trying to reinvent itself for a future that has already happened but with a cost base from the 1990s.”
Ferguson argues the failure of traditional UK life insurers to develop profitable platform offerings has limited pricing pressure in the market.
He says: “A huge amount of money has gone into building a viable platform business for a lot of these firms. If this were a conventional market you would expect the price squeeze to come from big insurers slashing margins to kill the little start-ups, but that hasn’t happened.”
Ferguson decided to establish his “little start-up” alongside Philip Martin, now of Openwork, after concluding the sector was failing to seize the opportunity presented by the rise of technology.
“I wrote the business plan in California in 1998 while I was on holiday.
“You could see other industries starting to restructure but it wasn’t happening in retail financial services. There’s a great David Bowie quote on technology and how it will break down barriers between providers and users: ‘We’re on the cusp of something exhilarating and terrifying.’
“I’m not sure it’s actually been exhilarating or terrifying yet – that’s still to come.”
The central aim behind Nucleus was to create “a transparent platform with a lot of influence from its users,” Ferguson says.
“That was the big idea but we screwed around for eight years trying to raise money.
“There’s a great David Bowie quote: ‘We’re on the cusp of something exhilarating and terrifying.’”
“We were keen not to be backed by a UK institution because we felt a seismic shift was happening where control was being passed from producers to consumers and their advisers. So we couldn’t be backed by an incumbent legacy provider because that would compromise the whole thing.”
But given a number of providers, including Standard Life, SJP and Old Mutual, now operate vertically integrated business models, has the “seismic shift” he predicted 18 years ago now stalled?
“Some people are resisting the direction of travel,” he concedes. “I can understand why but to try to throw together a bunch of component parts to create ‘SJP Mark II’ is quite risky.
“Most industries are going away from vertical integration and finding excellence in horizontals. When you think about the way we do most things in our lives, such as planning holidays abroad, we know we can take all the best bits and integrate them ourselves. Why would financial services somehow be a candidate for vertical integration unless all the components are world class? I don’t get it.”
Ferguson goes further, suggesting attempts to secure distribution by insurers reflects “a mindset that is stuck in the 1980s”.
“It infers a firm has a bunch of products to sell but nobody will be willing to buy them unless they own the distribution. It’s counter to everything the FCA is trying to do.
“Vertical integration can work if it’s about shortening the supply chain and becoming more efficient but not if you’re just getting 2,000 people to flog your products.”
The provider/adviser relationship is not the only issue exercising the minds of the industry. The majority of platforms will update back-office systems over the few years, a process so complex and costly that Legal & General decided to put its own platform, Cofunds, up for sale.
Nucleus completed its technology upgrade in 2014 but “defects” in the system affected trading between June and September. At the time, the firm said “hundreds” of customers were affected.
Ferguson says: “We obviously had issues and that was regrettable. Clearly things went wrong but nobody was disadvantaged as a result. If we had our time again I would put more resource into the post-live period. But nobody is going to do this without suffering some issues; to suggest otherwise would be ridiculous.
“The biggest challenge for a lot of companies in doing this will be remaining honest in their communications with advisers. A lot of these firms will find it hard because they don’t behave like that normally. But anyone who goes into this thinking they will sail through it is deluded.”
Having gone through the pain of replatforming, the Nucleus boss is now turning to the future and the developing role of platforms in advisers’ lives.
Ferguson rules out becoming a fund manager but says in the long-term the firm could have a role to play in closing the gap between institutional and retail fund prices.
“There must be a way to reimagine the way retail asset management works. If platforms could have a role in improving accountability and reducing fees, that is something we would want to do.”
In the short term, Nucleus faces a period of uncertainty as Ferguson reveals a stockmarket listing will be considered before the end of 2017.
He says: “The shareholder agreement that governs the business obligates us to look at an IPO by the end of next year. It doesn’t necessarily have to happen by then but we have to consider it.
“Eventually one person will want to sell one share in Nucleus, so it’s inevitable the ownership structure will change over time. Ultimately if all the IFAs want to sell the shares, it won’t be IFA owned anymore.
“But the culture and DNA of the business is established, so I don’t think it would matter a great deal who owned it as long as they respect the culture of the business.”
What’s the best advice you’ve received? Think big, act small, be humble.
What has had the most significant impact on financial advice in the last year? The accelerating polarisation between those who are living in the past and those who are building the future.
What keeps you awake at night? Nothing thankfully, although our three-year-old daughter is a reliably consistent provider of early-morning chatter.
If I was in charge of the FCA for a day, I would… Break the scope for cross-subsidies in vertically-integrated firms, with the aim of breaking the “buy distribution” mindset of some legacy providers.
Any advice for new advisers? Focus relentlessly on doing a great job for customers and deliver as much as you can over modern technology.
July 2006-present: Chief executive, Nucleus Financial Group
1999-2006: Founder and director, The Abacus
1996-1999: Marketing manager, Scottish Life International
1994-1996: Product development manager, Ivory & Sime
1991-1994: Trainee actuary, Life Association of Scotland