To find your perfect platform partner, there are questions you simply must ask that you may not have asked five or 10 years ago, writes Roo Janda…
Did you know that some advisers carry out their platform due diligence in the middle of their Christmas holidays? You might say that (joke coming up) they do it religiously. Some complete platform reviews once a year, some do it each quarter, a few run the numbers every month; that way, there’s always an up-to-date review on file. The point is that there is little consensus on when or how often it takes place.
However, there is something of a consensus on what firms look for in a platform. Traditional categories such as financial strength and profitability are among the first things firms screen for when carrying out a due diligence exercise, but are these still the right filters? In an age of digitalisation, automation, and Consumer Duty, could firms be overlooking their perfect platform partner by continuing to do things as they always have?
‘It’s just the way we’ve always done it…’
Compared with a decade ago, today there are more platforms, offering more wrappers, hosting more tools, and generally being able to do more things, yet analysing the market has never been simpler. Select your analysis tool of choice – the lang cat’s Analyser would be our pick – and away you go.
For many firms, platform due diligence is a straightforward exercise. To obtain a shortlist, ask:
- Has the platform got an AKG financial strength rating of at least B-?
- Is the platform in profit?
- Does the platform have at least [insert £bn] worth of client assets?
We know that many firms still place a high degree of importance on these aspects, and for good reason – one suggests a safe home for clients’ money, one indicates a sustainable business model (including a sensible price), one implies a degree of trust from the market.
Larger firms employing a compliance team and operating an investment committee may dictate certain minimum thresholds for these sorts of things before even considering whether a platform is worth doing business with.
So, these filters have always been important, and remain important. The question is whether there is a danger in inflating their importance relative to everything else.
‘If you can’t measure it, you can’t manage it…’
Each of the filters mentioned above are measurable. There’s comfort in that. It’s more difficult – from behind a desk even impossible – to gauge cultural fit. Yet we would argue that being able to ascertain whether a platform is a match for your business should be as much about strategy, direction, and culture as it is about profitability or net flows. Of course, capital adequacy is important, but so is research and development.
Cultural fit may include target market, ownership structure, data security, disaster recovery. We are getting into the more subjective part of it here, but we believe the subjective part is important. Plus, there are elements of ‘cultural’ due diligence which are measurable – the number of back-office integrations (indicating a commitment to digitalisation) being one.
One way to approach platform due diligence today might be to split the task in two.
First, complete a desk-based exercise covering platforms’ features (Has it got a Flexible ISA? Does it provide access to ETFs? Do I like the kit?) to shrink the market.
Second, consider the business itself (Do we share a view on market direction? Do we think alike on AI? Do I like and trust the people? Do I want to partner with them in my business and for my clients? Are my clients paying a fair price?)
The firms that approach due diligence in this way, seeking a partner to work alongside to benefit their clients, stand to win.
Things to watch out for
Companies will sometimes do some extraordinary things to keep hold of business – and platforms are no different.
One trend we have spotted involves a sharp price cut. Here’s how it works:
- An adviser firm completes a platform analysis exercise, considering both objective and subjective factors;
- A new (as in previously not considered), possibly smaller platform displays as a good match for the firm and its clients;
- The firm’s incumbent primary platform flexes its financial muscle to offer an immediate 10bps discount, provided the assets remain with it.
Nothing out of the ordinary there, you might think. But danger is lurking. The firm’s due diligence exercise has identified a platform as suitable, but it may lose out because of a marginal financial gain for the client. At which point the firm might ask: how much better off are my clients by paying 20bps instead of 30bps? If the firm believes in the suitability of the new platform – and the potential ‘knock-on effects’ adopting it could have on, for example, investment performance, reporting, and time spent with the client – those 10bps begin to sound a little less appealing.
Platform due diligence in 2023
So, we believe advised clients stand to benefit from a bit of a re-think on platform market analysis and due diligence. In a post-Consumer Duty world, advisers’ suitability assessments, evidencing, and record-keeping, will be under greater scrutiny. Finding a platform that’s ‘cheap, in profit, and holds over £30bn’ isn’t going to cut it.
We encourage firms to follow others that are beginning to look beyond the five or six typical metrics used to assess platform suitability, and to see what else is out there.
Each firm will have its own priorities but as a starting point we’d suggest asking:
- Is this platform a good cultural fit with my business?
- Can this platform offer the integrations I need it to?
- Does it offer the product and investment options and functionality my clients need?
- Is the pricing fair and reasonable for my clients to pay?
- Does the platform offer practice optimisation support and guidance, investment insights or behavioural research which can benefit me, my business and ultimately my clients?
- Is the business moving in a direction that fits with my future view?
In short, do I want to work with this platform for the long term, as a partner in my business?
Your clients will thank you for it.