The Investment Platform Revolution
Standard Life’s bold introduction of the FNZ powered wrap platform in 2005 sparked the beginning of the investment platform revolution in the UK. There is now growing evidence that conditions are right for this revolution to sweep through emerging markets.
When I arrived in Edinburgh in 2004 to head the UK business of Standard Life, I saw the opportunity for the UK to follow the Australian lead with investment platforms. The birth of compulsory defined contribution superannuation in Australia with the Prices and Incomes Accord in 1983 prompted an increase in coverage from around 50% to over 90% of the working population. As account balances grew members took a more active interest in their savings and governments could not help but impose layer upon layer of regulation.
Complex interactions with the nation’s means tested old age pension system and other social security benefits meant it was beneficial to obtain advice when employees changed jobs and or retired. Many traditional life insurance agents adapted their business models to concentrate more on providing advice about lump sum investments, both super and non-super and less on selling regular premium savings and protection plans. In the early days dealing with several fund managers for each client, was cumbersome, complex, error prone and inefficient.
The first wrap platforms streamlined the process providing benefits for clients, advisers and fund managers - a genuine win-win-win!
In 2004 the UK market was dominated by the sale of regular premium life and savings policies, lump sum annuities, mutual funds and single premium relatively high charge, high commission insurance bonds. Stakeholder pensions with their 1% charge cap were available but not as popular as expected by the architects of the system.
I strongly argued to my new colleagues that the Aussie wrap platform approach could transform the business of Standard Life and in turn the UK market. My next challenge was to convince them that the company should look outside for a system rather than attempt to develop it in house. Finally, after a rigorous assessment process, I needed to persuade the company it could trust the small team all the way from New Zealand to deliver.
Those early years were challenging but gradually the movement gained momentum with FNZ winning new clients and other platforms entering the market. At the time our forecasts that the total platform market would grow to GBP 150 billion in five years were treated with incredulity. Figure 1 shows the growth since those early days with the total funds under administration at the end of 2017 reaching a staggering GBP 569 billion. I am very confident and satisfied that the actual results have far surpassed the projections contained in our original business case.
Forward thinking advisers realised they could adopt the new technology and change their business models to good advantage. Instead of constantly being on the lookout for new initial commission business they could move to an arrangement based much more on accumulating funds under administration and building recurring revenue streams while providing ongoing service.
The pioneers were encouraged by a new publication, “New Model Adviser” which championed this approach. At Standard Life we had some fun helping advisers develop business plans to transform their operations and enjoyed parading in front of them some successful visiting Australian financial planners who were always happy to evangelise about the new world.
The new model involved moving:
- from searching for sales to providing a value added ongoing service,
- from worrying about transactions to building relationships, and
- from selling products to suggesting solutions.
This helped planners build real value in their businesses as industry participants transitioned from salespeople to trusted professionals.
Forward thinking advisers realised they could adopt the new technology and change their business models to good advantage.
The Retail Distribution Review introduced at the end of 2012 added to the momentum. It was designed to make the retail investment market work better for consumers. The rules required higher minimum levels of adviser qualifications, improved transparency of charges and services and the effective eradication of the payment of commissions to advisers and platforms replacing these with a more professional fee-based model. Wrap platforms which were becoming widespread came into their own.
Retail savings and investment markets around the world have tended to evolve along similar lines but the timescales have been quite different. It took the UK some two hundred years to develop. In the early days the “Man from the Pru” and thousands like him called on households on a weekly or fortnightly basis to collect small contributions. This was actually a very customer centric model as those collectors knew their clients and the lives of their clients very well and missed no opportunity to sell additional policies when lives changed.
The sophisticated market today is a dramatic contrast. Investors can access a bewildering array of investment opportunities, global in scope, from anywhere in the world any time any place on any device. Modern investment platforms are essential infrastructure for this new world.
Modern investment platforms are essential infrastructure for this new world.
When we combine this impressive facility with the growing professionalisation of sales people as many move from part time to full time and the increasing wealth, mobility and standards of living as countries develop, I believe we have the ingredients for a much more rapid evolution in emerging countries. Ironically the new model enables advisers and providers to go back to a genuine customer centric approach with benefits for clients, advisers and companies. The revolution is underway.