'Two nations divided by a common language' was George Bernard Shaw's observation of the relationship between the United States and the United Kingdom.
The Queen’s English and American English may have started out roughly the same, but under evolutionary forces they have developed their own distinct sounds and forms. Not everything that we have in common with our stateside cousins need be lost in transatlantic translation and in financial services, observing overseas models can be worthwhile.
Take the development of the fund platform industry, where the Americans have close to a 10 year head-start. The most notable difference is, of course, the scale; our US affiliate, FundsNetwork, alone administers $766bn in third party assets. Of course, the market is much bigger in the US compared to the UK, but already, it’s evident how successful the platform business is becoming here - they are now the dominant ISA distribution channel with gross sales of £313m in June.
From a standing start and in less than a decade, the platform industry here has established a very firm footing. Originally launched as simple multi-fund supermarkets, today’s platforms are more complex and rounded propositions than ever before. Their development continues and with some providers looking overseas for inspiration what might they find if they look west?
The breadth of services available to platform customers in the US redefines our understanding of the concept. They offer a full suite of assets classes including derivatives and alternatives; fully tailored and managed investment portfolios; cash management services with many of the facilities of your bank account; sophisticated investment planning tools; adviser training services; and practice management programmes offering a wide range of support to advisers to help them develop their businesses.
To think of a platform in the US as a simple fund distribution business could not be further from the truth - instead they are the one-stop-shop for the investor and the total back and front office solution for the adviser. ‘Guidance’ rules in the US, with many large groups providing support to the mass market through planning tools and simple packaged fund solutions. This more segmented model means that most financial advisers generally operate at the higher end of the market, either as total wealth managers or holistic financial planners.
Fee based remuneration is normal, and the mutual fund propositions are fine-tuned to offer the flexibility of multiple share classes where prices are different depending on who the fund is sold to. This means it holds the same underlying assets of the parent fund, but with different fee structures - so an advised fund would be sold with no inbuilt commission. Therefore, when advisers are remunerated, it is based on a level agreed with their customer. Sound familiar? In this respect, the US model looks much like some of the pillars of the FSA’s proposals in the Retail Distribution Review.
Platforms in the US have also blurred the distinction that remains in the UK between personal savings and pension provision. With employer sponsored personal pension plans (401k) the dominant force in US retirement provision, there is an obvious synergy between the needs of employers and their employees and the services offered by the sophisticated platforms. This has led to the integration of platform services in the workplace with employers offering a 401k enabled platform service on their intranet. So employees are able to manage their regular banking activity alongside their investment and retirement savings.
Platforms position themselves as complete pre and post retirement services, and since they provide a true picture of the clients overall wealth it is possible for investors and their advisers to construct the most effective portfolios for their lifetime income needs.
Saving and investment literacy is high in America, but there is still a big market for advice. With this workplace saving culture deeply embedded, US advisers have adapted and work alongside employers and individual employees to deliver their services. While there is no need today for this level of integration in the UK - the occupational retirement market does not demand it - the landscape may shift dramatically come the introduction of personal accounts in 2012. We shall see.
Platforms in the US are not just at the cutting edge of distribution and marketing; they are getting their hands dirty behind the scenes by offering full back-office services too. Among those services are: record keeping; client relationship management technology; business accounting; and portfolio management tools. All of which are all melted into the core system and therefore deliver managed support for the entire practice. Any adviser that takes this service up can then concentrate on the more important business of looking after their clients.
Operating this range of services - many of which are free at the point of use - requires serious scale and efficiency which is usually driven by a substantial investment in back-office or operations technology. This is because the profit margin of a mainstream platform is narrow and so any hope of profitability will disappear with inefficiency. This also leads to a consolidation of operators as mainstream medium-sided businesses find it hard to achieve the critical mass to break into profitability or invest to develop their unique selling point.
So in the US, two mainstream and most popular platforms - Fidelity FundsNetwork and Charles Schwab dominate the volume market, with smaller, niche providers picking-up the business that prefers to work with a smaller organisation or perhaps has specialist needs. This process of consolidation has already begun in the UK and over the short time that platforms have been emerging, the industry has seen new entrants come and go, as three or four larger and more established platforms strengthen their position at the top of the tree.
While there is a country mile between the US platform industry and that in the UK, both were sown with the same seed. And while you can tell that an oak is an oak, no two trees look the same. The industry in the UK will adopt the best, or the most appropriate elements of the US - and, indeed any other model, in its quest to deliver the best possible outcomes for clients and advisers. Rather than becoming a clone of the US industry, the UK will evolve its own version of the ‘genuine article’, very much like Americans have done with the English language.
David Dalton-Brown is head of Fidelity FundsNetwork
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