In evolutionary biology, the theory of punctuated equilibrium argues periods of stability are interrupted by a period of rapid change when external forces create an urgency for a species to adapt to a new normal.
Can we apply this to the UK platform industry?
We have a mix of regulatory change, coupled with new market entrants challenging the norm, but have we reached a point where rapid change is inevitable? Or will we see a gradual evolution of the market dominated by the larger incumbents?
Consolidation and vertical Integration
One of the main driving forces towards a new version of the platform market is the rise in M&A activity. Big advice firms are becoming larger to achieve economies of scale. This was sparked from new regulations and rising compliance costs, which make operating as a smaller advice firm harder to maintain.
Equally, we see vertical integration between manufacturers and distributors protecting their revenue, particularly in tougher market conditions. There are also a growing number of advice firms taking advantage of new tech to become platform providers.
This gives firms more control over their services, and lower fees from the technology providers allows them to increase their margin by retaining the fees for the additional services being provided.
The question for this model is, will it stay as a significant but smaller segment of the market? Or will it become the norm, putting traditional larger platforms and their technology providers under threat?
Regulatory requirements
When we look at what forces are creating a new landscape for platforms, increase in regulation requirements is right up there. The FCA’s recent interventions, such as Consumer Duty, are set to be meaningful and lasting changes.
The ever-increasing burden of complying with regulations leads firms to think negatively about taking on the additional liability of running a platform. They have to comply with their existing requirements as a distributor and also consider the requirements as a manufacturer.
This model, while viable for some of the larger advice firms, is not going to be right solution for most of the market. It is possible new entrants may capture some of the market but not all of it.
The model is attractive enough for some and the prize of that extra margin is tempting enough for this conversation to be relevant. To create a new normal, we also don’t need to see this become the dominant force. Influence of the larger players to change their model to compete is enough. Some would argue we’re already seeing this happen.
Fees
Even though costs have increased, we are seeing platform charges decrease. This is good for consumers and is the sign of a healthy, competitive market. Equally, the FCA is holding firms to account for their charging practices, as we have recently seen with the end of ‘double dipping’ on cash holdings.
The new technology entrants are challenging the level of fees that should be levied of platform technology and are forcing the hand of some in the market to look at whether their fees are competitive and offer fair value to customers.
Now that the services and processes have largely become commoditised, and automation becomes more prevalent, platform providers are going to have to justify where they are providing value, particularly when they are charging higher fees than competitors. Some are clearly looking and are deciding the fees must come down.
Technology
Combining the fees charged by new entrants with an attractive technology offering puts the provider in control of the services offered, using microservices or modular components.
Compare this to the challenges others have faced using bigger technology providers, not only in terms of timescales and re-platforming, but a lack of flexibility and high costs to adapt services. It is likely some are questioning if that is the right solution. The saving grace for many is the sunk costs and time taken to move to another provider. Tech firms will have to ensure they stay relevant in a market more focused on tech than ever before.
On the flip side, these large technology companies do have the resources and market position to move with the market demand. Technology providers will need to create a solution with much greater integration, configuration and automation than has previously been achieved.
With fees being lowered and new technology from the major providers either in production or coming soon, the challenge from new entrants has been heard. The question is whether there is the momentum for a large section of the market to move to a new model.
Given the pace of change in the platform market tends to be relatively slow, it’s more likely the major players in the market will be able to adapt to the new normal, while handing more control to advised firms to create the offering they need without many of the smaller and medium sized firms to take on the additional burden of providing their own platform.
While the attraction of increased revenue will be realised by some of the larger advice firms, this model is not going to work for many. The fact we see the evolution happening is a sign of a robust and competitive market which can adapt itself to different conditions.
Dom House is lead consultant at Simplify Consulting
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