Bigger isn’t always better

In the fifth of a six-part series on preparing for RDR, Kevin Okell, director at Altus, explains why a platform’s success should be judged on more than its total assets under management...

Platforms are on the march; rarely a month goes by without news of another milestone, whether it is AXA’s platform passing £2bn, Hargreaves Lansdown’s assets under management (AUM) rising 41% to £24bn or news that the platform market in the UK has ballooned to £164bn in assets.

All these stories have one thing in common – AUM, which seems to have become the de-facto metric for measuring platform success. Targets get set in terms of it, companies are ranked based on it and people occasionally get fired for not delivering enough of it. But is the platform industry right to obsess about just one headline number?

Like any other commercial enterprise, the ultimate objective of a platform business is to make a profit. Measuring AUM is seen as a good guide to a platform’s revenue stream and therefore, once there is enough of it, to its eventual profitability. In reality, things seem to be a little more complicated than that.

Ascentric and Novia are now making a profit on relatively modest levels of AUM whereas other, much larger, platforms are still to get there.

Varying business models

Differing costs obviously play a major part in accounting for this discrepancy but there’s another significant factor at work here too, business models. In the beginning there were fund supermarkets operating on the simple principle of bulk buying funds cheaper than individual investors and pocketing the difference.

Revenues were indeed a function of AUM and scale was everything. Then came wrap with unbundled pricing and the first step toward a different business model.
While unbundled prices were still expressed as a percentage of fund value, they were often tiered as wrap providers recognised the difficulty of justifying linear increases for the same service as investments grew.

Fund supermarkets may soon follow suit and we have already seen Cofunds announce plans for its unbundled proposition with a sliding scale of charges. What this model means is that ten £100k investors are worth substantially more to a platform than a single £1m investor.