Thoughts on the role and responsibilities of platforms in the financial landscape from GemCap UK Director and CEO Stuart Alexander.
I read with great interest an article recently on fund boutiques by Simon Evan-Cook, who I have known for a number of years as a very accomplished fund buyer. In his piece he was very articulate about the challenges for boutique fund managers, and he explored the way he saw the market today and the way forward. I had spoken to Simon when he was researching the piece, and we spent an enjoyable 30 minutes discussing the issues I have seen for Managers we have worked with over the years. One such issue has been the growth of Platforms and their effect on boutique fund managers.
Back in the annals of time, for the funds industry buying a fund was often a challenging situation with telephone dealing, contract notes and ultimately share certificates or similar. It could take days to complete everything. If you wanted to sell then it was the same again and you were very reliant on the post which when lost was an absolute nightmare! It also meant that from an administration point it could take a small back office just to look after the vast amounts of paperwork and, God forbid, a client wanted to do some bed and breakfast tax trading near year end. An absolute car crash waiting to happen if you weren’t careful/lucky…
But hold your horses, suddenly the Lone Ranger and Tonto came into view over the horizon in the shape of the fund platform, namely Cofunds, funded by a number of fund companies, and Fidelity Funds Network, funded by, well, guess who? Their appearance in 1996/7 sounded the death knell for fund purchasing administration hell, or so we thought. Their marketing was slick(ish) and their promises were even slicker. “We will increase your fund sales” was trotted out by the marketing teams and, at every conference in the late 90s, the same diatribe was rolled out from podiums up and down the country. Sure, there were some efficiencies of administration as netting off was clearly an advantage and paperwork was reduced. Straight Through Processing (STP) is still a pipedream but we will get there. However, as more and more platforms came to the market the ground swell of opinion was that Platforms were here to stay and we, the Funds industry, just better get used to it, as this was the future.
The introduction of the RDR in 2013 changed the fee dynamics and asset growth did rise but herein lies the nub of the point. Do platforms actually increase sales? Since those early heady days when the platforms “sold” themselves to the fund management industry I have struggled to fully engage with their belief that they increase sales. Sadly, the arrogance of some platforms started to show itself a few years after they launched, and having started with a “partnership” ideal wanting to sign up as many fund managers as possible, there came a point, the tipping point, where you had to join the platforms, or no trades were coming your way. The challenge was then to identify the platforms who gave you the access to the IFAs etc you needed to have access to. The same IFAs you already knew but now the platform partly controlled the relationship.
Advisers would instruct the fund managers that they needed you to be on a specific platform and suddenly the fund managers no longer had control. They were in the hands of the platforms, and this has not changed – in fact it has got worse. If the platform decides that you as a fund manager are not “worthy” then they decide you are not going on the platform. Their decision can be based on their workload, that they’re too busy, or that they don’t see enough demand, even if you have a few IFAs supporting your start up. The platforms are now dictating the landscape but are they increasing sales? No, of course not. Natural growth in the economy and a wealthier nation has generated more AUM. Wealth Managers and IFAs have grown the book of business over the last 25 years and have increased the overall financial proposition in the UK.
Platforms are now gatekeepers which seems perverse. They control the distribution landscape and more worryingly they are one of the reasons for the concentration of assets in some supertanker funds. These funds clearly generate huge revenues for the platforms, but they are bought by investors via advisors, not by the platform. They have no say in the conversation but what does that matter to the platform, as they have a revenue stream that just keeps giving? Why would a platform look to a boutique? Platforms do not engage with boutiques; they don’t nurture the next generation of fund managers as they are only interested in the big firms who spend vast sums on marketing and have even deeper pockets. This cosy cartel between the platforms and the Big Managers is an inevitability. It’s just market forces, but where does it leave innovation and what can be done to give consumers more choice?
Platforms need to understand that whilst today their revenue lines are from the big firms, they need to look towards the next generation. If a boutique has engaged a third-party marketing business such as LGBR Capital then they need to recognise that the boutique is serious about growing. It needs to sit down with these new managers, engage with them and help them access the market thereby ensuring diversity of choice for investors. They need to play their part in ensuring this industry grows and grows, with entrepreneurs developing new and innovative ideas that help investors and advisors alike. When did a platform last sit down with a boutique manager and ask them “how can we help you?” The conversation needs to be two-way and they need to be listening.
My question at the beginning was: are platforms asset growers or enablers? In my view they are just enablers, an administration necessity that everyone has to deal with – but they could become asset growers with the application of some broader thinking. Why not be seen as the industry pioneers around boutique development and help these businesses grow? Do we want to see a high street with the same old brands, or do we want to see something different, brighter, more divers, much more than plain old vanilla? Over to you platforms…