For the first time ever the platform industry nudged into collective profitability last year. But was this a one-off or the start of the industry's permanent move into the black
The platform market reached an history milestone in 2012 - it collectively went into profit for the very first time, according balance sheet analysis by Altus Consulting.
Altus, having previously warned that the industry was in danger of never approaching profitability, found that overall profitability was in fact achieved last year (albeit at a minimal level).
Now the question is: do these latest figures suggest platforms have moved into a sustainable position of cost-effectiveness or is 2012's success likely to prove the exception rather than the rule?
Research from Altus demonstrated that the platform industry nudged into collective profitability last year. Was this a one-off or start of the industry's move into the black?
Many individual platforms have reported healthy balance sheets and even record breaking quarters in recent months. Nucleus' first quarter results were a record for the IFA-owned wrap, after reporting a 113% surge in revenues for the first three months of the year.
Similarly, Royal London's Ascentric wrap platform reported assets under administration had risen 16% to nearly £6bn in the first three month of the year, in what the company said is the wrap's "best ever quarter". Ascentric followed this up with another record-breaking quarter in the three months ending September, as £1.25bn of new assets for the year to date represented a record in net new business this year.
Overall profitability may have been obtained but it is an incredibly minimal margin. Altus notes that the margin of profitability for last year is minimal at 0.00575bps.
Hardly a significant victory but, given the timeframe, it is a first step into the black and should not be dismissed out of hand. There is evidence to suggest platforms have received a boost this year as well, in terms of new money and also that a number of providers have sacrificed income in terms of charge reductions.
Altus director Kevin Okell said profitability was helped by the flow of new money, post-Retail Distribution Review (RDR), from life companies and despite the number of platforms cutting various charges.
He said: "While everyone is lowering charges, everyone is reporting record quarters. I suspect there is a lot of life fund money flowing into platforms as a consequence of RDR. It is a bumper time in terms of assets, despite sacrificing a few basis points."
Examples of platforms cutting charges in 2013 include Cofunds, which dropped its annual £40 fixed platform charge for all its clients on its explicit pricing model, and Nucleus, who cut charges for all portfolios between £500,000 and £5m.
In the context of whether the industry's profitability (marginal as it is) can be sustained, there has been a large amount of new money coming in but at the same time margins have become narrower.
Another factor which is likely to increase the chances of the industry maintaining overall profitability is the decline in the market share held by the largest providers. Figures from consultancy firm the Platforum show that, over the past three years, the market share of the top five platforms has fallen from 85% to 65%, reducing the impact a bad year for one major provider would have on the results for the industry as a whole.
Cofunds remains the largest providers by a considerable margin, accounting for 24% of the industry's assets under administration (AUA) by the end of September, and having passed the £60bn AUA mark shortly after.
Cofunds head of marketing Stephen Wynne-Jones said increased regulatory requirements resulting from both RDR and the regulator's PS1/13 white paper had upped initial costs but was not a likely to prove a long-term burden.
He said: "We live in an environment where there is a huge amount of regulatory-driven change. We had to redevelop both IT and business development systems and then train advisers and PS13/1 is exactly the same. It is a big factor.
"We are having to spend a lot of money on reacting to change that the regulator is bringing in which has increased our costs. In the next 12-18 months, there will not be as much regulatory change."
Something which could offset this necessary balance between AUA and costs is the arrival of super clean shares. If super clean deals are obtained through exclusivity agreements, the complexity behind re-registration will increase based on the emergence of more and more share classes, which will in turn drive up operating costs.
Diversification in terms of asset allocation may have pushed in the industry into profitability but asset diversification in terms of super clean exclusivity deals may be what drags it back out.
Staying invested could prove lucrative
Consider lasting powers of attorney
Less environment, more governance threatens to undermine firms' green credentials
Evidence your compliance