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Platform due diligence: Look for profitability not deep pockets

There is more to platform due diligence than cost, functionality and a seemingly wealthy parent company. Adviser firms need to dig deeper to protect their clients and their businesses, argues Abraham Okusanya, managing director, FinalytiQ

It’s probably no news to anyone that the FCA is obsessed about how advisers conduct due-diligence. So much so that the regulator is going to spend significant time and resources on a thematic review on the subject next year. It is expected that this review will cover a range of areas including platforms, DFMs, and even fund fees.

Here, I’d like to talk a bit about platform due diligence. For far too long, what many people in this industry refer to as ‘platform due diligence’ can be best described as ‘platform selection’ rather than due diligence in the true sense of the term. They tend to focus excessively on price and functionality. While these are important both to advisers and clients, platform due diligence in the truest sense should include a critical assessment of the long-term viability of the platform business.

To my mind, true due diligence isn’t just a regulatory requirement; it is a depth of process that we owe to clients. It’s what we do to protect our clients and, for that matter, our businesses.

Is your platform a loss-maker?

One way to assess the long-term sustainability of a platform is to look at profitability. The reality is that loss-making platforms, including those owned by life companies with deep pockets, are more likely to suffer underinvestment in technology/services, be acquired, shut down or exit the market. If a provider exits or is acquired, it is the advisers (and potentially clients) who will be left to pick up the pieces.

Advisers might take the view that a platform is sustainable just because they have got parents with deep pockets. However, many advisers will remember the bitter experience that surrounded the departures of AmEx in 2006, Lifetime and UBS in 2008, and Macquarie in 2011, all players with very deep pockets!

A more recent example, although not in the adviser space, is the execution-only platform Selftrade, with £4.2bn of assets, which shut its doors to new customers in 2013, and was eventually sold to Equinity in 2014; leaving parent company Boursorama to write down around £35.1m in losses.

The point here isn’t to speculate about any provider exiting the platform market; indeed we have absolutely no knowledge of any platform eyeing the exit sign, at present. The point is to challenge the perception in the industry that the future of a loss-making platform is secure just because they have parents that are well off.

Bitter eventuality

Talk of consolidation in the platform sector has been going around for some time. So far it remains just that, talk. But advisers must have a plan in place for this bitter eventuality, should it happen. One way to think about this is to consider which providers are likely to be acquired, which may exit the market and which tend to underinvest in service and technology.

The answers to these questions cannot be found in providers’ glossy brochures, off-the-shelf due diligence packs or by asking a provider’s local BDM. Simply looking at a platform’s AUA, net inflow or AKG rating is neither adequate nor offers any particular insight into the health of the underlying business.

Proper due diligence requires some serious data; you need to trawl through who-knows-how-many annual accounts and hundreds of data points to get a good picture of the financial health of the platform business. Armed with this data weapon, you then need to ask senior management some uncomfortable questions about the long-term viability of the business. Are they profitable? How do they stack up from an operational stand point? Are the technology systems they use starting to creak and fall over? Is there adequate profit to invest in technology and the future of the service?

Hopefully, this sort of questions will spark a meaningful, if challenging, dialogue between platforms and adviser businesses, not to mention challenge platform providers to find ways to improve efficiencies within their businesses.


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