UK investment platforms: sharpening the competition among asset managers

The UK investment platform industry has grown exponentially. In 2013, retail and institutional platforms combined had £250 billion of assets under administration (AUA); by the end of 2017, this had doubled to £500 billion (FCA Investment Platforms Market Study).

This growth has largely been driven by changes in the pension landscape, including the closure from the late 1990s of defined benefit schemes, followed by the progressive liberalisation of pension schemes, including the arrival of ‘pension freedoms’. Now, asset managers and investment platforms are facing new opportunities and challenges in distributing funds to this growing investor base.

In the first article in our new “UK funds focus” series, Matt Adams, Head of Asset Manager Client Line UK, reviews the changing structure of the UK’s investment platform market, how asset managers are adapting and the role that servicers have to play in underpinning this infrastructure.

Adviser platforms take lion’s share

In the UK, approximately 38% of AUA are in D2C (Direct to Consumer) platforms catering directly to retail investors. This market is dominated by a single provider, Hargreaves Lansdown, which has a market share of about 40%. D2C platforms have been bolstered by the popularity of passive investment strategies and ETFs, which offer a low-cost, low-maintenance vehicle for inexperienced investors. Allocations to ETFs are considered by many to be in their infancy in Europe, especially in the retail space, so we can expect further growth as investors understand them which, in turn, could lead to increasing supply via D2C platforms.

The remaining 62% of AUA are on platforms often referred to as B2B, catering to independent financial advisers (IFAs). This is a characteristic particular to the UK market – in the majority of other European countries, D2C platforms dominate. Despite predictions that the 2013 enforcement of the Retail Distribution Review would reduce the propensity of UK investors to rely on advice from financial advisers, this proved not to be the case. Instead, the Financial Conduct Authority’s (FCA) figures from their Investment Platforms Market Study show that the B2B segment grew much faster than D2C platforms between 2013 and mid-2017. The advisor platform market is less concentrated: none of the top four platforms has a market share as high even as 20%, and the market shares of these four have changed markedly in recent years.

There has been much debate in recent times about the threat posed by robo-advisors. However, their effect so far has been limited. Although one in three DIY investment accounts opened in the year to the end of September 2018 were robo-accounts, they are not taking market share from D2C platform and instead, seem to be catering for a different audience. The average portfolio size of a robo-customer was £10,485 in 2018, compared with a market average of £47,000 for all non-advised accounts. This could reflect the type of investor who has embraced this style of investing. With the expected influx of millennial investors in the coming years, perhaps the outlook may change for robo-advisors.

Supplier turns customer: vertical integration on the rise

Notwithstanding the limited impact of robo-advisors, the shape of the investment platform industry is set to change as asset managers and platforms look to overhaul their traditional business models and explore new methods of distribution.

On the one hand, Vanguard, the world’s largest passive manager, entered the UK retail platform space with its own captive platform in May 2017 and quickly approached the £1bn sales mark within a year. Legal and General Investment Management also launched its own D2C online investment platform in 2018. On the other hand, some platform providers such as Hargreaves Lansdown are engaging in backwards integration by creating and promoting their own funds.

The sector has also seen some M&A among platform providers, such as D2C platform Interactive Investor’s 2017 purchase of TD Direct Investing. This particular acquisition was funded by private equity, which is showing increasing interest in the sector. Moreover, a number of companies running both D2C and adviser platforms have floated in the past couple of years – an alternative way of raising new money to plough back into platforms.

Putting the investor first: regulatory scrutiny creates new pressures

Investment platforms and their asset managers are also facing new scrutiny due to the FCA’s Investment Platforms Market Study, which sets out to improve competition between platforms and improve outcomes for customers. The final report, published in March 2019, made two key proposals:

  • A cap or ban on exit fees
  • Rules enabling investors to switch platform without having to sell their investments

Currently, most providers have succeeded in acquiring retail investors new to D2C platforms rather than incumbent customers of other platforms; only 3% of DIY platform users have switched over the past three years. The FCA’s proposals aim to increase the proportion of customers who switch, and in doing so, encourage competition between asset managers.

Key to this is customers’ awareness of their ongoing fund charges and other associated costs, such as entry and exit fees. This issue was first explored in the FCA’s 2017 Asset Management Market Study, which showed that among all investors’ website visits to look at funds, fewer than 9% of visitors looked at charges. The study also found that platforms rarely show advisers the individual and weighted average fund charges their clients are paying. This meant that even if advisers consider charges when selecting funds, it is not easy for them to assess ongoing value-for-money for their client.

Increased competition, increased collaboration

With the increased purchasing power and influence of platforms, the need for asset managers to analyse their asset flow across investor types and markets is greater than ever. They will need to assess whether their choice of platforms can be justified, both in terms of their business model and the value offered to the investor.

As asset managers strive to find the most cost-efficient distribution models, data has a crucial role to play. Fee data, customer demographics, longevity and distribution spend should all be analysed in order to assess the profitability of different distribution channels. Asset servicers and other market participants are making significant investments in order to aggregate this data and offer the intelligence that managers require. Servicers also have a critical role to play in ensuring optimal efficiency data across the wider sales process, for example, by helping to provide a better picture of the total cost of ownership.

It would seem that, to remain competitive, the solution lies in a blend of technology, data and transparency. AXA Investment Managers, for example, has committed to enabling clients “to buy funds like books on Amazon”[1], and is working with servicers to develop a new front-end platform that makes it easier for investors to buy funds. In the UK, an additional 8.6 million people are predicted to reach pensionable age (65+) by 2037. Asset managers, platforms, and servicers will need to collaborate to ensure that demand for investment returns can be met, and that this growing population can benefit from increased choice.

[1] Ignites Europe, 7 March 2019