Written by Adam Jones, Guest Blogger on Thursday 2 February 2017
There has been a silent war rumbling for many years now. It started with the emergence of a new market competitor around the turn of the century; Investment platforms. These flashy new web based offerings promised to provide the perfect antidote to the heavily paper driven world of financial advisers. They were structured to take away the pain of having to maintain direct relationships with umpteen fund groups across the country and to offer a simple and compliant way of managing trading, custody, settlement, client money and the all-important remuneration calculations.
Credit where it’s due, platforms have made a pretty good job of sorting out the administrative mess at the back end of most advice businesses. We certainly live in a more scalable and robust world than we did ten years ago as a result. This said, platforms haven’t really done a great deal for customer management. Don’t get me wrong, having an electronic source of some of a customer’s wealth was a revelation for many when the first platforms launched to market. A daily valuation of a price which is derived daily, delivered live to a computer screen near you. Hallelujah!
The problem, however, was (and still is) that only some of the client’s wealth is represented on a platform and platforms on the whole haven’t done a great job at spreading their wings to clients’ broader finances.
Enter the other side of the aforementioned war; adviser back office systems. Positioning themselves as a cross between a domain specific CRM system and an ‘advice process’ workflow engine, these systems have always had customer records at their heart. The problem has typically been the ‘everything else’ that they should have like up to date investment valuation and product positions, ancillary product line data and market information. Of course the challenge here is that those investment valuations are based on assets held across many platforms (and also many non-platform entities).
And so, for the last decade or so, both sides of the debate have shared a relatively uncomfortable co-habitation. The problem is, this uneasy equilibrium is bound to break at some point. Both parties are desperate to avoid being relegated to a utility service which is solely price differentiated. To counteract this, both platforms and adviser back office systems will try and claim more of the value chain. For platforms, there is a logical extension into offering better services around the ‘IP’ of asset selection. Be it through select fund ranges, internal DFM portfolios or additional investment selection tools, there is potential for platforms to make themselves increasingly useful to the investment committees and fund pickers at networks and firms.
Platforms also have the ability to improve their end-client interaction. Many already offer client portals as an additional enhancement for their advisers, and with the introduction of open banking and PSD II next year, it would be very straightforward for platforms to start pulling in customer banking data and building wider and more holistic views of client’s financial lives.
Adviser back office systems are equally well placed to start enhancing their offerings by building on the client portals that many already offer to make them more user friendly, and more integrated with a client’s financial life. They have the added benefit of already having access to a range of assets held across multiple platforms, while platform providers by definition only have access to one.
The one great gap for adviser back office systems is functionality for trading, custody and settlement. Without this, adviser back office systems will never completely remove investment platforms from the value chain but addressing this would be no mean feat as the area is riddled with complexity, both from a technology and a regulatory point of view. If they managed it though, it would likely leave adviser back office systems as the true central tool for adviser firms.
Of course, the regulator waded in on this during the RDR by all but dictating that advice firms are likely to need to use more than one platform unless they are particularly adept at segmenting their client books. As many of the larger firms struggle to maintain accurate address details for their clients, I think that might be a challenge and could put adviser back office firms off the idea of removing the platforms from the value chain. This said, there is a reasonable argument that the platform itself is secondary to the charging model and investment ranges which apply to specific clients. If adviser back offices were able to carry out some reliable segmentation of clients and tailoring of product based on this, they could be offering useful and compliant services.
It feels to me that there will be a shift over the next few years for both platforms and adviser back office systems as they position themselves to take more of the value chain. Both have challenges ahead which are central to their current business models. For platforms it is becoming a resource which can see wider than the walled garden of assets it holds in custody and potentially expanding into deeper investment services. For adviser back office systems it is the implementation of trading, custody and settlement which is both compliant and robust. For the victor the spoils are a solid place at the heart of the advice firms they service. For the party that fails, at best a future as a utility provider servicing business at the lowest possible margin and at worst, complete obsolescence.