Only 15 out of 26 platforms made a pre-tax profit last year, according to a recent report.
By any measure, this is worrying for an industry entrusted with hundreds of billions worth of client assets. With the new regulatory capital regime applying more rigour and scrutiny to the financial strength of self-invested personal pension (SIPP) operators, parallels and distinctions can be drawn from the two sectors. After all, they share, and often intersect, adjacent markets.
Examining the two might offer a glimpse as to what the future may hold across the broader SIPP market.
Continued consolidation in the platform and SIPP markets is as close to a certainty as I can offer, but for very different reasons. Spiralling technology costs do not appear to be under control as evidenced by the significant losses posted by some platforms and the need to reinvest ridiculous sums on “re-platforming”.
On the other side of the coin, SIPP operators’ margins are being squeezed (albeit to a far lesser extent) by increased regulatory costs. While losses appear in platforms’ 2015 financial statements, there have been indications of further instability in 2016.
In May, prior to the European Union referendum, the Investment Association reported net retail outflows of £54m for the top five platforms. Following the Brexit vote, net retail outflows reached £684m. It’s a tough game.
Looking ahead, I imagine that total client charges will prove unsustainable at current levels. This is especially true against a backdrop where more advisers outsource investment management to discretionary fund managers, adding yet another layer of cost to the client.
The question is whether clients truly get value from each of the component parts and this will drive further price pressure on both platforms and active fund managers.
The daunting prospect of reducing assets under management and increasing price pressure, coupled with continued, significant technology spend, is a toxic mix for anyone. Perhaps the traditional platform model will unravel in the future.
One thing is evident among platforms (and I would argue the SIPP market, too): biggest is not always best. Life offices will no doubt persist in the face of platform losses in the pursuit of vertical integration. But there are others proving it is possible to turn a modest market share into a profit and offer a choice in the process.
The platform market has shown that independent providers do have a role to play. This is perhaps to a greater degree in the SIPP market where providers generally have different business models, do not need the same volumes to hit profitability and are not overly reliant on the technology play.
That said, 2016 witnessed the number of SIPP operators reduce by almost a quarter. Another similar cull would still leave 50-plus firms competing for business. Does having a larger pool of SIPP operators than platforms make sense? I believe it does. Unlike the platform market, the SIPP market is polarised.
Platforms clearly compete in the pension mass market, but demand exists beyond this. Commercial property is one example – platforms and life offices are simply not interested in operating in this area.
Adviser selection criteria is materially different for platforms and SIPPs. Functionality and ease of use rank at the top of the list where platforms are concerned, whereas high levels of service and technical adviser support are critical factors in selecting a SIPP partner.
A personal service from knowledgeable people will continue to be a differentiator for independent SIPP providers, as will being able to offer genuine whole of market access to all asset classes.
Fewer participants in the platform and SIPP markets is inevitable, but the fittest and leanest independent providers will continue to prosper.
Eddie McGuire is managing director of @SIPP