Platform providers had been in a comfortable position until last summer. The shift from defined-benefit (DB) to defined-contribution (DC) pension schemes and the growing trend towards self-directed investment has propelled funds into online investment platforms in recent years. But the threat of a regulatory clampdown on exit fees charged to customers wanting to pull their cash, together with a downturn in equity markets, has now cast a pall over the industry.
Wealth management platform AJ Bell could be forgiven for feeling a little nervous about its upcoming main market debut, which is slated for December or early next year. The offer – which was open to those that were UK customers by mid-October – is expected to achieve a value of around £500m. If it goes ahead, the IPO will follow secondary offers from Nucleus Financial (NUC) and IntegraFin (IHP) earlier this year and AJ Bell will join industry behemoth Hargreaves Lansdown (HL.) on the London market.
But not all investment platforms are equal. Hargreaves Lansdown caters directly to customers, offering sharedealing services, self-invested personal pensions (Sipp) and individual savings accounts (Isas). On the other hand, Nucleus and IntegraFin are wrap platforms marketed predominately to financial advisers, managing money on behalf of their retail clients, while AJ Bell offers a mixture of the two services. What the UK-listed players do have in common is their poor share price performance in recent months.
Putting the brakes on flows?
A slowdown in new business across the industry has weighed on investor sentiment. Hargreaves Lansdown reported weaker-than-expected net inflows of £1.3bn during the three months to the end of September, down from £1.5bn at the same time last year. Chief executive Chris Hill blamed the slowdown on "an uncertain market environment and weak investor sentiment resulting in an industry-wide slowdown in net retail flows".
Nucleus suffered the heaviest dip in net inflows during the third quarter, which came in at £282m compared with £426m in the previous year. "Investment sentiment has been fairly unsettled by the volatility in the markets," says founder and chief executive David Ferguson. "We also had something of a high point last year with DB transfers."
Investment platforms typically earn revenues in two ways: share and fund dealing charges and fees for holding money on the platform. The latter – charged as a percentage of the customer’s portfolio size – generally contributes more to revenue, so a slowdown in the pace of asset gathering could translate into a reduction in revenue growth. That’s in addition to lower market returns, made by investing assets held on the balance sheet.
IntegraFin chief executive Ian Taylor said that, while disruption in equity markets is concerning, investment platforms can be used for a range of services and not just sharedealing. "Hopefully customers will now see the decision to put money in or take money off a platform as an administrative decision rather than an investment one," Mr Taylor says.
Paul McGinnis, financials analyst at Shore Capital, says it is worth remembering that most of the assets under administration on all platforms are in some type of tax wrapper (Sipp or Isa) making it "pretty sticky". "The only way Sipp money leaves is via a transfer to another Sipp provider or by actually drawing on it post the age of 55, while Isa money withdrawn would lose its tax-free status and could only be put back on a platform at a rate of £20,000 a year," he says. "Clients could just sell equities and leave the money in cash inside the platform or wrapper ready to reinvest, but that’s not a disaster for the platform."
Under the regulator’s spotlight
But choppy equity markets are not the only hurdle wealth management platforms may be facing. In July, the Financial Conduct Authority (FCA) proposed banning exit fees, after raising concerns that charges deterred customers from moving providers. While exit fees are not a substantial contributor to the top line, the announcement knocked Hargreaves Lansdown shares (the largest direct-to-consumer provider) due to fears of increased switching.
Interactive Investor, the UK’s second-largest fund supermarket, this week announced it would scrap exit fees with immediate effect, after temporarily removing fees last year.
However, Hargreaves Lansdown’s Danny Cox says re-registration involves a considerable amount of manual work per stock. The group charges £25 a holding to move assets to another provider and a £25 account closure fee. "If the FCA decides to ban transfer fees across all financial products and not just investment platforms, we would be supportive of it", he says. "If a ban just related to investment platforms it would distort the market."
Meanwhile AJ Bell’s Charlie Musson says the group’s charging structure is based on customers only paying for the services they use. "It means that only the small number of customers who need to use that service pay for the work required and this enables us to keep the platform fee that all customers pay each year very low," he says.
However, the breadth of services offered by Hargreaves – which has a share of around 40 per cent of the direct-to-consumer online platform market – could stand it in good stead to hold on to customers even if exit fees are banned. Jefferies analyst Phil Dobbin reckons a ban doesn’t pose any real threat to business for Hargreaves: "It’s not the cheapest on the market, but it continues to gain market share," he says.
