From hard sell to UK giant

On the tenth anniversary of FundsNetwork, Fidelity managing director of UK defined contribution and retail Gary Shaughnessy talks to Katrina Baugh about what the future holds for the platform.

Imagine you worked for FundsNetwork’s sales team when the platform launched ten years ago this month.

Although the concept of the fund supermarket was well known in the US, over here in the UK it was a very different story. Advisers were sitting in offices surrounded by piles of paperwork.

Every fund they recommended to a client had to be bought from the fund provider separately and more paper was generated. Only a few advisers were using email so most transactions were paper-based and fax machines and post rooms were frantically busy.

Into this environment came FundsNetwork, which launched with 14 providers and 250 funds. Some advisers readily embraced the concept and were keen to use the new technology to simplify their business but for others, it was too big a step.

Fast forward to today. FundsNetwork now has £27.4bn AUA, over one million customers and offers 1,200 funds from 87 groups. This could be just the tip of the iceberg too with many commentators predicting huge growth in the platform industry in the lead-up to and post RDR.

Rapid response

For many firms reaching their tenth birthday is a major milestone. Undoubtedly, as FundsNetwork enjoys its first decade in the UK there will be celebrations a plenty but for them, like all players in the platform space, the party can’t go on for too long.

Gary Shaughnessy, MD of UK DC and retail, is quick to point out the challenges for platform providers as they struggle to respond to rapid technological developments, changing adviser needs and a regulator which has platforms firmly in its sights.

“Platforms are capital intensive technology businesses. Advisers want to know a platform will be there for the next 20 years and more and it does require capital to continue running and invest in the business.

“We are petty much doubling our investment spend on the platform over the next 12 months. This is partially due to issues of scale and the pace of change in the market. There are also opportunities in the decumulation market and there are changes as a result of the  RDR and regulation. It is not a business that can stand still.”

The problem of profitability

It is this need to continually evolve which makes it difficult for Shaughnessy to address the thorny issue of FundsNetwork’s profitability ten years on from launch. It is a problem facing the wider platform industry with margins on running these kinds of business some of the tightest in financial services.

“In terms of profitability it depends how you apply costs. On one level ‘yes we are profitable’, but then if you include investment spend I would say we are ‘deliberately not profitable’. For me, what is important is the value we are creating. We could generate significant profitability for the platform overnight but this would mean turning off the investment spend which I am not prepared to do.”

Shaughnessy is well placed to meet the challenges of deciding what is needed from Funds-Network over the next ten years.

During his 20 years in the financial services industry he has worked in roles covering general insurance, life and pensions, personal finance and investments.

He joined Fidelity in his current job in 2008. However, before that his roles included chief executive of M&G’s retail business and subsequently managing director of Prudential’s Retail Life and Pensions business in the UK and Europe.

Looking to retirement

Indeed, it is in the retirement space where Shaughnessy sees much of the potential for the development of Fidelity’s overall platform business. It already has a separate DC proposition but it is the overlap between this area and the platform for retail advisers that Shaughnessy is excited about.

“The RDR puts the adviser firmly on the same side of the table as the client. In terms of charging by fees, they can look after clients who have as much in client occupational schemes as retail money. The growth of the DC market is rapid and people like ourselves are growing their DC share. But the question for us is ‘How can the platform support both of these areas?’

“This is especially relevant when you look at the tax changes affecting high earners. They don’t want that separation on the platform and they want to be able to move money between occupational and retail parts of the platform.

“The underlying core of the platform is the same for both sides of the business but the middle engine is different and so is the presentation. We are looking at further ways they can come together, as we already set up fund partner relationships across both sides of the platform, for example.”

Whereas the past ten years have focused on helping investors with the accumulation phase, Shaughnessy says the next few years will be centred just as heavily on decumulation.

The Government’s announcement it will look at scrapping forced annuitisation at 75 is welcomed by Shaughnessy and adding retirement income products, offering more flexibility to investors, is another area of development for the platform. He also stresses the importance of the role of tax efficient savings such as ISAs and pensions going forward.

“The next stage for ISAs is simplification. There is also the opportunity to create a simple mechanism which would allow you to link an ISA into a pension. The reality is for a lot of people, particularly younger savers, putting money into a locked box is a bit of a hurdle.

“ISAs are a great mechanism to get people saving and they often use them for retirement savings anyway but the link needs to be more explicit.”

Broader horizons

FundsNetwork has a pretty packed development schedule which includes expanding its product range to include ETFs and investment trusts.

Shaughnessy says: “Over the next couple of years, we will be broadening the products available as well as the development of the ways fees and charges are structured to meet the new adviser charging rules coming in under the RDR.

“We also want to develop our services with functions like portfolio rebalancing as well as other investment tools. In addition, we want to give advisers and their clients further insights and investment information.”

However, one path Shaughnessy is reluctant to go down at the current time is creating greater links between FundsNetwork and the asset management arm of Fidelity.

“Clearly we have a very strong investment management capability, but we do not want to  mix the two if this is not wanted by the adviser. “We are driven by adviser demand and are not trying to channel them down one particular route. One worry about guided architecture is the degree to which advisers see it as a benefit and not a way of us funnelling business. It all comes back to being clear about the financial model for your platform and being clear and transparent about how you make money.”

Some of the other issues faced by Funds-Network are challenges that must be addressed by the industry as a whole.

The most important of these is simplicity around charging which has become a major point of contention as the FSA unveils its Discussion Paper on the platform market.

Shaughnessy says: “One area which is not as visible as it should be in the platform market is cost and it is our own fault.

“When it comes to bundled or unbundled charging there is not one that is right or wrong.

Fundamentally, what we need is more transparency in terms of what functionality does a platform offer and what are the costs you are paying for it? Any conflict of interest should also be highlighted clearly to the adviser or the investor.

“The adviser should be able to see the costs of that platform at a detailed level and that is the right solution for their clients.”

He says this is an area, like the development of a re-registration system, where the industry could work together to create a standardised operation in a set time-frame. Only if they failed to do so would the FSA be forced to step in.

The next few years will be crucial for the evolution of FundsNetwork as it holds advisers’ hands as they transition their business to meet RDR requirements. The next ten years could also be the decade of the superplatform with a potential untapped market of £3,000bn and even the launch of a pan-European offering. There is still huge potential for growth in the platform space, but FundsNetwork will need to ensure it keeps evolving to meet rapidly changing adviser and client demands over the coming years.