When our whitepaper “Giving your platform wings” was published back in 2018, it’s fair to say the world was a slightly different place. Sure, the sun still rose in the east and set in the west but the idea of a global pandemic was far from most people’s minds and a Bank of England base rate of 3.5% was certainly not on the cards.
The paper revisited the much-discussed theme of profitability within the investment platform market. At the time, total combined assets under administration (AUA) sat at around £660bn and the industry was starting to show signs of long-term profitability, thanks in no small part to a certain Bristol-based profit making machine.
However, with over half the market still reporting operating losses, particularly those platforms that had been born from the traditional life companies, it was clear there was still a long way to go for some.
Several platforms have already indicated they expect to see a short-term slowdown in investing
Revisiting the paper in 2020, our updated review “Sticking to the flight plan” painted a somewhat brighter picture.
The analysis indicated the average cost of running a platform, measured in basis points (bps) per pound AUA, had fallen across the industry, from 22bps in 2017 to 19bps at the end of 2019, with total AUA up 38% at £790bn. A sign that platforms had managed to trim some fat and drive-up operational efficiency.
But while revenue across the industry also continued to grow during the period, it hadn’t managed to keep pace with the growth in AUA. Revenue expressed in bps had fallen 5%, continuing the trend seen over the preceding decade.
That being said, the platform industry as a whole did appear more profitable than it had been two years prior, with nearly 60% of platforms now reporting a profit. What was still unknown at the time of publication, however, was what the impact of Covid 19 and its associated operational challenges would be on platform profitability.
So, just after two years on from our last analysis, we thought we’d take another look at the numbers and see just how platforms fared during the pandemic years.
First things first: AUA. It’s been well publicised that the UK retail investment platform space was one of the sectors to benefit during the pandemic. With time on our hands and cash to spare, UK retail investors both old and new found a new level of engagement with their finances. This, coupled with buoyant stock market valuations, resulted in the value of assets sitting on UK investment platforms reaching north of £1trn by the end of 2021.
As platforms face their own inflationary pressures, it remains to be seen whether this will be enough to keep costs at bay
Once again, our analysis shows the cost of running a platform, when expressed in bps per pound AUA continued to fall during the period, sitting at 18.5bps at the end of 2021. This fall is shallower than previous years, given the steeper incline in AUA, no doubt due in part to the costs many platforms experienced through the move to remote working and the forced adoption of digital processes.
Running a platform remains a low-margin business and, at the end of 2021, our analysis indicates still only 60% of platforms were reporting a profit. No change on the figure from two years prior.
Which brings us to today. Just as the world platforms found themselves operating in changed drastically between 2019 and 2021, the environment they find themselves in today has moved on once again.
As the cost-of-living crisis plays out, it is understandable that retail investors, seeing a real-term reduction in their investible income, may look to divert funds from their platform wrappers. Several platforms have already indicated they expect to see at least a short-term slowdown in investing.
For the most part, the benefits of flexible working and adoption of digital processes have been fully embedded as part of business as usual operations at many platforms, and change agendas have once again shifted back to strategic initiatives. But as platforms face their own inflationary pressures, it remains to be seen whether this will be enough to keep costs at bay.
In an industry with historically low margins, we may yet see the platform profitability progress we have witnessed begin to reverse.
Jack Berrisford is a consultant at Altus
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