The key question for advice firms considering the adviser-as-platform route are the increased costs and risks outweighed by the extra basis points earned on platform fees?
A totally bespoke platform carries not only high risks of ownership but high cost of delivery and increased complexity.
Unfortunately, these risks cannot be outsourced away and the platform owner is ultimately responsible for ensuring third parties are fit for purpose. We also know that platform profit margins are skinny, under constant pressure and require continual levels of investment.
There are some potentially serious cost considerations beyond the basics that some advice firms may not have fully considered. Take administration errors, for example, for which they are now liable. If a client instructs a trade and it fails to happen on time, yet the markets move and the client loses out, then, under best execution rules, the platform needs to make good that shortfall.
Likewise, if a change in investment policy requires a programme sale of an asset within a model portfolio and the payment from the asset manager doesn’t arrive by the end of the day, then under CASS rules it is the platform that must cover the shortfall. For example, imagine £500m is run within the model and there is a policy change to sell 5% in one fund. This £25m must be covered by the platform using its own money until the sale proceeds arrive. Any advice firm considering full ownership needs to have substantial capital reserves in place to cover such eventualities.
There are some other thorny issues to consider. A platform is invariably a connected system of underlying solutions so if something goes wrong, you need to ensure you have the appropriate oversight and controls in place with each counterparty so that you can quickly identify and resolve issues. With connected independent systems, this is not always straightforward since you may find the technology suppliers believe other parties in the tech stack are responsible. And, if the technology issues result in losses, can you seek the appropriate redress from your system providers?
As it is a highly commoditised product, firms won’t benefit from any differentiation at a product level by moving into manufacturing, as the real opportunities occupy a space within user experience. This is where the UIUX layer comes into play through a white label offering such as Embark’s, providing a unique service model that allows you to take ownership without taking the risk.
If you use a technology provider and become a co manufacturer or manufacturer in your own right, then the level of risk and cost rise significantly.
Embark offers a variety of white label models that support firms through centralised investment propositions, planning tools, investment research and consultancy, with integrated advice, and a range of products and services that fit specific capability gaps, while not burdening firms with additional operational risks.
There is no doubt there are some efficiencies to be gained by the advice firm taking on some of the tasks involved in platform ownership, especially where it enables the removal of an unnecessary link from the advice fulfilment chain. However, not all tasks can be taken in-house by the adviser, so the extent to which streamlining can occur has limits. If streamlining efficiencies were to exist at scale, we might expect adviser-as-platform ownership to result in a lower total cost of advice, but we have yet to see the evidence that confirms this is the case.