With the Retail Distribution Review (RDR) implemented half a year ago, the UK life, pension and investments markets are starting to experience the real impact of one of the most significant reforms in the retail investments market. This blog is the first of four, which seeks to provide stimulus for discussion on strategic challenges for the different market participants in the post-RDR world.
This blog focuses on the likely future landscape for intermediary platforms.
Assets under Management on intermediary platforms are estimated to grow significantly. However, the competitive pressures and cancellation of rebates are likely to squeeze revenue margins moving the break-even point to circa £40 billion in Assets under Administration. As a result, assuming similar levels of industry concentration, less than 10 intermediary platforms are likely to be profitable by 2018 indicating a potential major consolidation wave.
While estimates vary according to different sources, the Assets under Administration of the UK intermediary platform market are estimated to grow from circa £200bn to £600bn by 2018. This growth is largely driven by continued demand from intermediaries who see platforms as an essential part of their RDR compliant, fee based proposition.
Currently the intermediary platform market is dominated by a handful of players with Cofunds, Skandia and FundsNetwork leading the pack. Other players, notably the vertically integrated providers such as Standard Life and AXA, are continuing to invest in improving their service offering. Besides there are many other smaller niche players resulting in roughly 30 market participants. All these providers seek to gain market share and to control distribution and back books in order to grow into a profitable business model.
With pressure on margin across the value chain and platform rebates being abolished, platform fees might be squeezed from 30 basis points to 20 bps, moving the break-even point significantly up from c. £20bn of Assets under Administration to c. £40bn. With only £600bn to divide, this results in a maximum of 15 companies breaking even. With the five biggest platforms account for c.70% of the market, it is likely there will be only eight to ten profitable platforms by 2018.
The combination of advisers having signed up to multiple platforms already, squeezing margins and limited differentiation between platforms, is likely to result in consolidation around a few scale players, with a small number of niche providers remaining.
Winning platforms will be those who are able to differentiate themselves over and above technical platform functionalities (e.g. integration with advisers' back office software, financial planning tools, discretionary management outsourcing) and are on top of the consolidation wave. These platforms will also be able to maintain or improve upon their operational leverage
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