Financial & Operational Strength – its role as a

IN ASSOCIATION WITH:

Financial & Operational Strength – its role as a foundation in platform due diligence

Adviser Guide, November 2020

CONTENTS

ADVISER GUIDE: FINANCIAL & OPERATIONAL STRENGTH – ITS ROLE AS A FOUNDATION IN PLATFORM DUE DILIGENCE

AKG has made every effort to ensure the accuracy of the content of this guide, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this guide and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service.

Third party trademarks are used with the permission of their respective owners.

Introduction/background........................................................................................................... 2 Executive Summary ................................................................................................................... 4

The variation of ratings in the platform sector ..................................................................... 5 AKGfinancialstrengthratings .....................................................................................................................................5 Thespectrumofratingsinthesector ...................................................................................................................6 Theessentialdifferencesbetweenratings ...........................................................................................................7

Adviser views on due diligence & resilience .......................................................................... 8 Questions&Commentary ...........................................................................................................................................8 What is the financial strength/sustainability assessment process designed to appraise? .11 RatingSectorOriginandEvolution ......................................................................................................................11 Operationalfinancialstrengthandtheadviser/customerfocus ...........................................................11 Beyondjustsolvencyorreturnofmoneytocustomers? ........................................................................11 OutlineofAKG’sbalancedscorecardapproachtoassessment ..........................................................12

Role of platform due diligence ...............................................................................................13 Therequirementfor,andbenefitsof,duediligence ....................................................................................13 Platformfit–abalancingact ....................................................................................................................................13 Platformagility ...................................................................................................................................................................13 Reasonstoreview ..........................................................................................................................................................13 Stayingonthefrontfoot .............................................................................................................................................13

Approaches for advisers conducting due diligence and assessing financial strength .....14 Framework ..........................................................................................................................................................................14 Consideringongoingfactorsandparameters ................................................................................................15 TheFactorsandplatformbusinessmodeltypeswhichmightprovideelementsofcomfort

orconcern...........................................................................................................................................................................16 Lookingoutforwarningsigns ..................................................................................................................................16

Avalon Case Study ...................................................................................................................18 Background .........................................................................................................................................................................18 KeyLessons ........................................................................................................................................................................18

State of the platform nation - market data and commentary ...........................................19 Platformassetsunderadministration ..................................................................................................................19 Platformgrossandnetsales .....................................................................................................................................19 Impactoffactorssuchasmarketvolatility,theslowdownindefinedbenefittransfersand

themacro-economicenvironmentoncurrentplatformproviders ...................................................20 FundscapePlatformprojections .............................................................................................................................21 Thenextfiveyears-Fundscapepredictions ..................................................................................................21

Key points ..................................................................................................................................22

BACKGROUND

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MARKET RESEARCH COVID-19

SincethisAKGprojectwasinitiallystartedwehaveallbeen impactedbythespreadoftheglobalpandemicandwehavehadtorespondto the associated challenges presented.Theguide has not been produced because ofCOVID-19butthisepisodedoescoincidentallyserve to further illustrate the key tenets ofthe guide in underlining the importance offinancialstrengthandoperationalresilienceintheplatformsector.

ThisAKGguidefocusesontheimportanceofplatform financial strength, sustainability andoperationalresilience.High-levelobjectivesforthisAKGguideareto:

•Produce an independent, educational, andpracticalresourceforadvisers,paraplannersand others concerned with the resilienceof platforms in order to drive positivecustomeroutcomesandexperience

•Look at the importance of the financialstrength and sustainability of platformmarketincumbents

•Consider the potential impact on adviserbusinesses when and where deficienciesin platform operator financial strength,resilienceandsustainabilitymightarise

•Encourage advisers to be on the front-footwithassociatedduediligenceandriskmanagementprocesses.

To support the delivery of this guideAKGposed a concise set of research questionsviaonlinesurveytoanadviseraudience.Theresearch was carried out on AKG’s behalfby PollRight, a division of Citigate DeweRogerson,takingplacebetweenApril17andMay15,with100surveyrespondents.

OBJECTIVES

We hope this guide is a useful resource for advisers considering due diligence and the operational and financial resilience of the platforms they work with. We were delighted to sponsor the guide which contains a number of instructive ways for advisers to think about these issues. Matters of financial strength and the ability of a platform to keep investing in their proposition and service have arguably never been more topical given the headwinds facing all businesses at the moment as a result of the coronavirus pandemic.

- Ronnie Taylor, Chief Distribution Officer at Aegon


https://www.aegon.co.uk/index.html

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EXECUTIVE SUMMARYDuediligencerequirements-Therequirementtocarryoutrobustplatformduediligenceandtoensurethatthisismoremeaningfulthanabox-tickingexerciseiscrucial.

Theoverarchingframeworkfromwhichtobuildoutrobustduediligenceexercisesshouldcontainthree components which are spelt out inmore detail in the guide.These components are –Proposition;Operational;StrengthandSustainability.

COVID-19 overlay -The impact of the pandemic is effectively serving to exacerbate and/oracceleratesomeofthemomentumchallengesforplatformoperators.

TheheadlinefactorsfromAKG’sresearchonadviserconsiderationofplatformswitching,includinglevelsofcharges/feesandofservice,indicateareaswhereplatformoperatorscannotaffordtogowrong,underserveorunderdeliver.Alloftheseareactually,tosomedegree,implicitlyorexplicitlyreliantonfinancialstrengthtoenactthem.

Platformimpairmentorfailureisnotjustahypotheticalrisk.

Andadviserresearchcarriedoutforthisprojectreinforcestheimportanceofconsideringplatformoperatorfinancialstrengthandsustainabilityinselection/retentionprocesses.

Thereisaneedforabroadcriteriaconsiderationandcontextwithinfinancialstrengthassessment-withabroadbaseofstrengthrequiredtodealwithevenunknownstresses,aswellasthosethatcanorhavebeenmodelled.


“Advisers cannot be prudential regulators, but the elements of due diligence outlined in this guide provide an excellent checklist that advisers can use to interrogate platform providers.”

Keith Richards Chief Executive Officer of the Personal Finance Society

https://www.thepfs.org/

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THE VARIATION OF RATINGS IN THE PLATFORM SECTORAKGassessesandratescompaniesandotherentitieswithinspecificpeergroupsorsectors.Suchpeer groups are fundamentally designed to reflect howcustomers and their advisers considercompaniesforuse.

ThePlatformsectorcoverscompaniespositionedasplatformsorasprovidingasignificantintegralcomponentofaplatformserviceoperation,i.e.companiesthatmightbeseentocompeteinthedeliveryofplatformservicesandcapability.

Theobjectiveof theAKGrating is toprovideasimple indicationof thefinancial strengthofaPlatformcompanyfromtheperspectiveoffinancialadvisersintheUKwho,whenactingonbehalfoftheirclients,needtoascertainacompany’sabilitytodeliversustainedoperationalprovisionofproductsorservices.

AKG FINANCIAL STRENGTH RATINGS


“Financial strength must not just be about solvency, it has to be about maintaining trust in the market. If clients experience a serious disruption in the service they get from a platform provider, confidence in investments will suffer, and it is right that advisers should protect their own reputation and confidence in the market overall by taking financial strength into account when they choose a platform provider. Clearly, with many factors in play, opinions will differ about the financial strength of a single firm, but

these ratings provide a useful starting point for the conversation.”

Keith Richards Chief Executive Officer of the Personal Finance Society

Brand Company FS Rating7IM SevenInvestmentManagementLLP BAdvancebyEmbark SterlingISAManagersLtd B+AegonPlatforms AegonInvestmentSolutionsLtd B+

CofundsLtd B+AJBellInvestcentre AJBellplc B+AllianceTrustSavings AllianceTrustSavingsLtd B-Ascentric InvestmentFundsDirectLtd B+AvivaPlatform AvivaWrapUKLtd B+BNYMellon|Pershing PershingLimited BBravura BravuraSolutions(UK)Limited BEmbarkPlatform EmbarkInvestmentServicesLimited B+FNZ FNZ(UK)Ltd B+FundsNetwork FinancialAdministrationServicesLtd BGBST GBSTWealthManagementLimited BHargreavesLansdown HargreavesLansdownAssetManagementLtd B+Hubwise HubwiseSecuritiesLimited B-JamesHayPartnership JamesHayWrapManagersLtd BMoventum MoventumS.C.a. CNovia NoviaFinancialplc BNucleus NucleusFinancialServicesLtd BOldMutualWealth OldMutualWealthLtd B+Parmenion ParmenionCapitalPartnersLLP BPlatformOne PlatformOneLtd DPraemium PraemiumAdministrationLimited CRaymondJames RaymondJamesInvestmentServicesLtd BSEI SEIInvestments(Europe)Ltd B+StandardLifeElevate ElevatePortfolioServicesLtd AStandardLifeWrap StandardLifeSavingsLtd ATransact IntegratedFinancialArrangementsLtd B+TruePotential TruePotentialInvestmentsLLP BWealthtime WealthtimeLtd B-

Source:AKGRatingPortalasat5November2020

https://www.thepfs.org/

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PlatformsareassessedbyAKGinrelativetermswithinaspecificpeergroupofplatforms.

Giventhediversepoolofplatformusers,arangeofdifferentiatedplatformbusinesseshaveevolvedtoinhabittheUKmarket,andthere are challenges and opportunities regardless of whereplatformsoperate.

Alladviserplatformsareawareofthedifferingtypesofadvisersand clients in themarket and,whichever name is used by aplatform to describe its adviser/client segmentation model,everyplatformwillhaveastrategyalignedtoservicethatpartofthemarketinwhichithopestobemostsuccessful.

Privatelyownedplatformshavesuccessfullydevelopedspecific/nichepropositionsalongsideglobalfinancialcompanieswhichhavedevelopedoracquiredtheirownplatforms.Therehasbeenverticalexpansionandintegrationinsome,whereplatformsare,indifferingdegrees,nowacorepartofthewiderproposition.

Differentiation is also seen in the facilitation of, and differingapproachesto,whitelabelling.

Fromaratingsperspective,thestrengthofaplatformisbaseduponmanyfactors,andthemixofdifferentplatformbusinesstypes and operatingmodels described above has led to thewiderangeofplatformratingsacrosstherelativelysmallpeergroup.

Rating Scale

A SuperiorB+ Very StrongB StrongB- SatisfactoryC WeakD Very Weak

Theratingtakesintoaccountmanycriteriawhichareseenasrelevanttoplatforms,including:solvency,capitalandassetposition,expensemanagementandprofitability,parentalstrength(andlikelyattitudetowardssupportingthecompany),operationalcapability,managementstrengthandcapability,strategicpositionandrationale,strength/depthofcontractualagreements,brandandimage,investmentintheproposition(technology,product,servicefeatures),theoperatingenvironmentandabilitytowithstandexternalforces,amongstothers.

Anindividualcriterionsuchas,saySolvencyforexample,wouldreflectawidedisparitywhenlookedatacrosstheplatforms:

THE SPECTRUM OF RATINGS IN THE SECTOR THE ESSENTIAL DIFFERENCE BETWEEN RATINGS

AJBellInvestcentre

AegonPlatforms(ARC)

AegonPlatforms(Cofunds)

AllianceTrustSavings

Ascentric

AvivaPlatform

BNYMellon|Pershing

Embark

FNZ

FundsN

etwork

Hubwise

JamesHayPartnership

Moventum

Novia

Nucleus

OldMutualW

ealth

Parmenion

PlatformOne

Praemium

RaymondJam

es SEI

SevenInvestmentM

anagementLLP

StandardLifeElevate

StandardLifeWrap

Transact

TruePotential

Wealthtime

1600.0

1400.0

1200.0

1000.0

800.0

600.0

400.0

200.0

0

Source:AKG,collatedfromplatformdataatlatestavailableyear-endfinancialstatements/Pillar3Disclosure


Solvency Capital Requirement Coverage

Coverage%

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AKG considers that no single factor ormeasure is dominant, and the assessment approach used for allAKG ratings is that ofabalanced scorecard,witha combinationof criteria assessed.Therefore, theremaybeno individual criteriawhichprohibits (orautomaticallyincludes)acompanyfrom(in)aspecificratingcategory.

Somecriterianonethelessnecessarilycarrymoreweightingthanothers.

Forinstance,thesizeoftheplatformbusiness,inwhicheverabsolutemeasureisused-AUA,netbalancesheetassetsoranyothersuchcomparablemeasure-reflectsahistoryandrangeofunderlyingfactorsbehinditandassuchalargefigurecannotbeignored.Assuch,theselargerbusinessestendtocomparerelativelywellwithintheAKGratingscale,temperedofcoursebyunderlyingtrendsinassetflows,actualfinancial/businessperformance,andotherfactors.

Parentalstrengthandattitude,understandably,haveaconsiderableinfluenceontheplatformentityrating–andthiscanbenegativeaswellaspositiveofcourse,dependingontheparentinquestion.Inmanycases,theparentcompanyprovideskeysupportintermsoffunding(capitalforinvestment,liquidity,regulatoryrequirements)andotherresourcessuchasstafforfacilitiessuppliedonamanaged,rechargeablebasis.Thecontinuedaccesstosuchresourcesandagroupstrategythatincludestheplatformasakeyelementwillbeseenasverystronginfluencersgenerally.

Within theplatform sector,AKGconsiders the technologyunderlying theplatform service andoperationalprocesses, and suchrelationshipsarea factor in the ratingprocess.AKGalsoprovides ratingson theunderlying technologyprovidersandhere thatrelationshipwiththeclientfacingplatform,andthedepthandtypeofcontractualrelationshiptheyhave,becomesamoresignificantfactorforthesetechnologycompanies.

Thevariousfactorswithinthebalancedbusinessscorecardapproachthereforeguidethefinalratingassessmentintothecategoriesinthetableabove.ThedifferencesbetweenA,B,CandDratings forexamplecomedownpurelytocomparisonsbetweenthecompanieswithinthepeergroup.

Inthecontextofthepeergroup,againstotherplatforms,aSuperior(A)ratedoraVeryStrong(B+)ratedcompanywillshowbettermetrics–inabsoluteortrendterms-acrossalargenumberoftheassessmentcriteriacomparedtoaB(Strong)business;andaC(Weak)platformwouldnotexhibitthesamelevelsasaB-(Satisfactory)ratedplatform.

Awell-resourcedbusinesswithastrongpropositionandpositiveservicemetricsthatattractsnetassetinflowsinitstargetmarket(s),backedbyaperforming,financiallystrongandsupportiveparent,will,forinstance,fallintothecategorymostlikelytoachieveoneofthehighestratings(B+orA)comparedtotherangeofotherplatformsassessedwithinthepeergroup.


Levelofcharges/fees 74%Rangeofinvestmentoptions 71%Onlinefunctionality/tools 59%Rangeofproductwrappers 53%Financialstrength/sustainability 53%Servicelevels 44%Investmentfunctionality 31%Operationalresilience 26%Technicalsupport(pensions,taxetc) 22%Relationshipmanagement/onboardingresources 8%Fixedfees 1%

RespondentswereaskedtoselecttheirtopfivereasonsfromthislistofoptionsSource:AKGadvisersurvey,April/May2020

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ADVISER VIEWS ON DUE DILIGENCE & RESILIENCE

ThissectionoutlinesAKG’sadviserresearchfindings,compiledspecificallyforthisguide, includingquestionsbasedonwhatitemsadvisersconsiderfromaduediligenceperspectiveandthefactorsthatwouldmakethemswitchplatform.

Most important selection criteria when existing platform partner(s) selected

AKGwantedtolookbackandfindoutwhatadvisershadtakenintoconsiderationatthetimewhentheyselectedtheirexistingplatformpartner(s).

Forthisquestionrespondentswerethereforeofferedachoiceof11criteria/factorsandaskedtoconfirmtheirtopfiveselectioncriteria/factorswhencarryingoutselectionoftheirexistingplatformpartner(s).

Thelevelofcharges/feescamethroughfirst,underliningthefierceprice/margincompetitionintheplatformmarket,withtherangeofinvestmentoptionsaclosesecond.

Onlinefunctionalitycamethirdandrangeofproductwrappersandfinancialstrength/sustainabilitywerejoint-fourth.

Notably,servicelevelsandoperationalresiliencecamejustoutsideofthetopfiveselectioncriteria.

Thismaybeinpartbecausetheseitemsareperhapsharderforadviserstogetahandleonwhenseekingtoestablishnewbusinessrelationships.Butthefindingsfromthisresearchquestionhintatthefactthatoriginalselectionprocesseshavepotentiallybeenoverlyfocusedonplatformproposition-basedselectioncriteria.

QUESTIONS & COMMENTARY


“In my role as a due diligence consultant to advisers, I see a wide variety of approaches to assessing platforms. It is interesting that advisers do not rate financial strength as the top consideration when selecting a platform. Maybe they assume that because the platform is an enabler and the assets are ring-fenced if things go wrong, that clients won’t directly lose money if a platform fails. However, clients will inevitably panic if they can’t view or withdraw their money. Choosing a platform with questionable financial strength is not a client

relationship risk that advisers need to face.”

Jon Baker, Jon Baker Consulting

What were the most important selection criteria when you selected your existing platform partner(s)?

https://jonbakerconsulting.co.uk/

Impactofreplatformingexercises 52%Impactofchangeincorporatestructureand/orownership 45%Complaintsfromclients 45%ImpactofFCAreviewofplatformmarket 34%Impactofinvestmentmarketvolatility 27%ImpactofM&Aactivity 27%Impactofchangesinseniormanagementteam 15%Impactofnewcomersintheplatformmarket 10%Other(pleasespecify) 2%

Bothyouradviserbusinessmodelandclientservicingmodel 66%Yourclientservicingmodelandcapability 27%Youradviserbusinessmodel 5%

Neither 1%


Source:AKGadvisersurvey,April/May2020

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Which market development/issues give advisers the most concern?

Throughtheresearchwewerekeentoidentifywhichpotentialmarketdevelopments/issuesgiveadvisersthegreatestcauseforconcernwhenconsideringtheoperationalandfinancialresilienceoftheirplatformpartner(s),andtheirongoingsustainability.

Giventhesheeramountofreplatformingexercisesthathavetakenplaceinrecentyears,twinnedwiththefactthatmanyofthesehavenotgoneasplanned,onemighthaveexpectedtoseeadvisersexpressingtheirconcernsabouttheimpactofsuchexercises.Somewhatinevitablythereforethiscamethroughinfirstplace.

In joint second were two important but contrasting concerns. Clearly given that many clientservicingmodels and capability within adviser firms are underpinned by platforms, complaintsfromclientslinkedtothequalityand/ortimelinessoftheservicebeingdeliveredwouldgivecausefor concern.Advisers also expressed concern around the potential impact of a change in thecorporatestructureand/orownershipattheirpreferredplatformpartner.

SomeevidentlystillhaveaneyeontheFCA’splatformmarketreviewandanyassociatedimpactfromensuingregulatoryactivities.

Where might impact of deficiencies in operational and financial resilience be felt?

Thestudywantedtofindoutatahigh-levelwhereadvisersenvisagedtheimpactofanydeficienciesinoperationalandfinancialresiliencemightbefelt.Two-thirdsofrespondentsrecognisedthatmattersrelatingtotheongoingsustainabilityoftheirplatformpartner’soperationalandfinancialresiliencewouldlikelyimpactonBOTHtheiradviserbusinessmodelANDtheirclientservicingmodel.

When considering the operational and financial resilience of your platform partner(s), and their ongoing sustainability, do you consider this from the point of view of any associated impact on?

When considering the operational and financial resilience of your platform partner(s), and their ongoing sustainability, which of the following potential developments/issues give you the greatest cause for concern?


Pg.10

Levelofcharges/fees 66%Servicelevels 66%Financialstrength/sustainability 58%Onlinefunctionality/tools 52%Rangeofinvestmentoptions 46%Operationalresilience 42%Investmentfunctionality 33%Rangeofproductwrappers 31%Technicalsupport(pensions,taxetc) 13%Relationshipmanagement/onboardingresources 11%Fixedfees 2%



Where might deficiencies be seen, or difficulties experienced?

Giventhatmanyadviserrelationshipswithplatformpartnershavebeeninsituforsometimenow,AKGwaskeentodigdeepertofindoutwhichfactors,whenthingsweren’tperhapsgoingsowellorlookingsorosy,mightbringonthoughtsofswitchingplatformpartner.

For this question therefore respondents were asked, should they see any deficiencies in, orexperiencedifficultieswith, anyof the factors listed (respondentswereofferedachoiceof11criteria/factorsandaskedtoconfirmtheirtopfivereasons)whichwouldcausethemmostcauseforconcernandencourageconsiderationofplatformswitching.

Leveloffees/chargeswasstillatthetopbutnowjoinedhere,asyoumightexpect,byservicelevelswhichhadrisenuptheorderfromcriteriausedwhenexistingplatform(s)wasselected.

Financialstrength/sustainability,whileretainingitspositioninginthetopfive,hadalsorisenuptheorderfromtheoriginalquestion.Operationalresilience,whilejustoutsidethetopfive,hadalsoriseninimportancebutperhapssurprisingtostillseethislowerdownthelistofconsiderations.

Thesefindingsstarttohintatfactorswhicharepotentiallymoremissioncriticaltoadviserbusinessesthansomeofthemorecosmeticcriteriawhichinaheavilyintermediatedandcompetitivemarketonemightexpecttoseereadilyavailablefrommostplatformplayers.

Should you see deficiencies in, or experience difficulties with, any of the factors listed below which would cause you most concern and encourage consideration of platform switching?

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WHATISTHEFINANCIALSTRENGTH/SUSTAINABILITY ASSESSMENT PROCESS DESIGNEDTOAPPRAISE?

RATING SECTOR ORIGIN AND EVOLUTION

OPERATIONALFINANCIALSTRENGTHANDTHEADVISER/CUSTOMERFOCUS

Prior to the introductionofPlatformsAKG’s focushadbeenpredominantlyon lifecompanies.However,inlightofthegrowingimpactofplatformsandthetransformationthatthisbroughttothefinancialservicesmarket intheUK,therewasanincreasingdemandfromintermediaries inparticulartowidenthescopeofentities.FastforwardandAKG’splatformsectorwillbe10yearsoldinDecember2020.

AKGbelievesthatoneofthemajorconsiderationsforanintermediaryinconsideringaplatformisthecomfortandassurancethatcanbeobtainedfromanindependent,externalassessment.

There are a couple of common, but understandable misconceptions associated with financialstrengthassessment.

Firstly, that financial strength is purely about solvency. It is not.Whilst solvency will always beimportantandafactorinfinancialstrengthassessment,itisnotthewholepicture.

ThedefinitionofcustomerorientedandoperationalfinancialstrengthisusefulhereandatAKGwebelievethatafinancialstrengthassessmentshouldincludethefollowingobjectivedefinition:

...to go beyond purely a consideration of solvency (albeit this will always be an important part of the mix) and consider in what format an organisation may be able to survive to meet the reasonable expectations of customers and their advisers. Expectations, which must include the experience encountered by these two groups, will therefore include ongoing operational abilities and performance.

Thisdefinitionisthenalsorelevanttothemisconceptionofbelievingthatfinancialstrengthisjustabouttherecoveryofclientassets.Recoveryofassetsisofcoursecrucial,buttorestrictfinancialstrengthconsiderationtothiscouldbemisleadingandfallsbelowtherequirementtodeliverabroader setof customeroutcomes.Manybusinesses such asplatforms,DFMs, assetmanagers,orevenfinancialadviserscansometimesmakethismistake.Thinkingthat,‘well,theassetssitwithacustodian,orthereisapolicyholderprotectionschemewhichwillkickin,andsomyfinancialstrengthwon’tmatter’.

Isthatgoodenough?Effectivelysayingthatifthatpartofthecustomervaluechain,somehowfailsorisimpaired,therewillbenochangeincustomerexperience.

Unfortunately, that simply is not the case.The route to asset recovery or protection funds/compensationisnottheexperiencethecustomerreasonablyexpectedwhentheysignedup.Andtheuncertainty,delayanddistresscannotbesoeasilydismissed.

AKG’s approach to and definition of financial strength is to consider a company’s strength tosustainanoperationandcontinuetomeettheneedsofcustomersandtheiradvisers.

Thisisfundamentallydifferenttootherratingsandassessments,suchascreditratings,designedtosatisfymarketinvestors.Thestrengthandsustainabilityinterestsofmarketinvestorsandcustomersaredifferentandmayevenbeatodds.

So, ensuring a customer-oriented focus to financial strength is key and sustainability revolvesaroundacompany’s ability tomaintainoperational capability tomeet theneedsof customers.Expectationsincludetheongoingdeliveryofappropriateoperationalservice.Henceacompanyneedsstrengthandsustainabilitytodothis,meetingvariouschallengesovertime.

BEYONDJUSTSOLVENCYORRETURNOFMONEYTOCUSTOMERS?


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OUTLINEOFAKG’SBALANCEDSCORECARDAPPROACHTOASSESSMENT

Financial Strength ratings communicateAKG’s customerorientated assessmentof a company’sability to maintain operational capability to meet the needs of customers.These ratings arespecificallydesignedforusebyadvisers,workingonbehalfofthesecustomers,theirclients.

It is solely this customer perspective, reflected inAKG’s rating approach,which is relevant foradviserduediligenceandselectionactivitytodelivertherequiredcustomeroutcomeperspective.TheassessmentapproachusedforallAKGratingsisthatofabalancedscorecard,withacombinationofcriteriaassessedandnosinglefactorormeasurebeingdominant.

Theassessmentandratingtakeintoaccountthoseofthefollowingcriteriawhicharemostrelevant:

•capitalandassetposition•expensepositionandprofitability•structure(andsize)offundswithinthecompany•parentalstrength(andlikelyattitudetowardssupportingthecompany)•operationalcapability,managementstrengthandcapability•strategicpositionandrationale•brandandimage•typicalfundperformanceachievementsorproduct/servicefeatures•itsoperatingenvironmentandabilitytowithstandexternalforces

Atahigh-levelandusingtheAKGassessmentreportstructureasaguidethesecriteriacombinetoconsiderattributesinfouroverarchingareas:

•Capital•Strategy•Administration•Risk&Governance


“To me, financial strength can be seen as a proxy for the overall health of a platform. It is crucial that the platform provider has the ability to readily invest in and continually improve functionality, user

experience and security. If a provider cannot regularly upgrade the platform, which can cost many millions of pounds per year, then there is a risk to the resilience and sustainability of that platform.”


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ROLE OF PLATFORM DUE DILIGENCE

It is in thebest interestsof adviserbusinesses to carryout robust, repeatable, and recordableresearchandduediligenceexerciseswhenselectingpartnersfortheirbusiness,includingplatformoperators.Theseexercisesshouldbedonetofacilitatebestpracticewithintheadviserbusinessand, crucially, to support thedeliveryof goodcustomeroutcomes. Furthermore, the regulatorremainskeentoseeevidenceofdeeperandmoreengagedduediligencebeingcarriedoutbyadvisers.

Inamarketwhichcontinuestoexperiencegreatchangeandchallenge,duediligencecontinuestoincreaseinimportanceandissomethingwhich,inanidealworld,needstobedonewhenfirstidentifyingandselectingpartners,andthenrevisitedonaregularbasis.

ItwouldbefairtosaythattherehasbeenplentyofwaterundertheproverbialbridgesinceadviserbusinessesfirststartedtoutiliseinvestmentplatformsintheUK.Andhencerelationshipswithone,orseveral,platformoperatorswillmostlikelyalreadybeinplace.

Buttherequirementtocarryoutcomprehensiveresearchandduediligenceexercisestosupportplatformpartnerselectionand/orretentionremains.Andhencethereislikelytobeanelementofreflectionwhencarryingoutongoingreviewworkwhichaccommodatesthesentimentoftheadviserbusinesstowardstheproposition,serviceetc.beingdeliveredbyexistingplatformpartners.

Similarly, some beliefs and approacheswithin the adviser businessmight have changed in thisintervening period, for example the composition and delivery of investment proposition forcustomers.Ensuringthefitofexistingand/ornewplatformsintermsofdeterminingtheirabilitytoservicethisinvestmentpropositionmaythereforeberelevant.

Byadoptingrobustduediligenceprocesses,adviserbusinesseswillputthemselvesonthefrontfootwith regards to establishing and sustainingwinning relationships with platform operators,deliveringpositivecustomeroutcomesandbeingabletobetterrespondtochangeandchallenge.

Mostthingsinlifeareaboutstrikingtherightbalanceand,atahighlevel,findingtherightplatformfitisalsoabalancingact,wheretheaimistoidentifyandcorroborateachoiceofplatformswhichcan:

1.Supportthedeliveryofcustomerservicespropositionandoptimisecustomeroutcomes(acrossdifferentcustomersegments/typeswhererelevant).

2.Workincollaborationwithyouradviserbusiness,itsstaff,technology,structure,andprocesses.

Becauseofthevariouschallenges,platformoperatorsneedtoillustrateagilityintheirbusinessandintheirproposition,includingthetechnology/digitalcomponent.Thisisnotnecessarilyallaboutsizeandresource,althoughcapitalreservesandongoinginvestmentwillinevitablyberequired.Butdisplayinganabilitytorespondtomarketchangesanddevelopmentswhilekeepingabreastofevolvingadviserandcustomerrequirementsiskey.Platformsurvivalisamarathon,notasprint,althoughwithvariousobstaclestosuccessinplace,perhapssteeplechasecouldevenbemoreappropriate!

THE REQUIREMENT FOR, AND BENEFITS OF, DUE DILIGENCE REASONS TO REVIEW

STAYING ON THE FRONT FOOT

PLATFORM FIT – A BALANCING ACT

PLATFORM AGILITY


“Platforms are a crucial component in many adviser businesses, and changing platforms and migrating assets can be expensive and time-consuming. Inertia and familiarity also play a part. However, it is

like your home insurance, the insurer, policy conditions and premium may have been right last year, but it doesn’t necessarily follow it will this year. Ongoing due diligence is essential.”


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APPROACHES FOR ADVISERS CONDUCTING DUE DILIGENCE AND ASSESSING FINANCIAL STRENGTH

Hereweoutlinefoursuggestedapproachesandelementsthatadviserfirmsmightwishtousetosupporttheirduediligenceandassessmentexercises,whetherthesebedonein-houseand/orwiththesupportofthird-partyresources.

Westartbyprovidingasuggestedoverarchingframeworkforintermediaryfirmsfromwhichtobuildoutduediligenceexercises,lookingatthreecorecomponents–Proposition; Operational; Strength and Sustainability-andpresentexampleitemswithineach,whichshouldrepresentkeyduediligenceareasforconsiderationwhenselectingandre-appraisingplatformpartners.

Proposition

•The right blend of products, taxwrappers and investmentoptions to meet adviser business and customer segmentrequirements.

•A charging structure which can dovetail with the adviserbusiness’scustomerchargingframework.

•Toolsandserviceswhichcansupportthedeliveryofadviceandwealthmanagementservicing.

Operational

•Strongriskandgovernanceculturewithassociatedstructureandprocessesinplace.

•Safecustodyofcustomerassetsandcustomerdatasecurity.•Functional interaction with external third parties, includingadviserbackofficesystems,assetmanagersandDFMs.

•Reliable and timely delivery of helpful online and offlineadviser/customertoolsandservices.

Strength and Sustainability

•Abilitytoinvestincontinuedplatformimprovements,includinginfrastructureandtechnology.

•Strongandresilientkeybusinessperformanceindicators.•Brandanddistributionreach/traction.•Clear business growth and development strategy in place,shortandlongerterm.

•Well blended Senior Management Team with grasp ofregulatoryandlegislativedirectionoftravel.

FRAMEWORK


Pg.15

Ongoing monitoring - Indicative list of parameters to monitored

Whilstkeybusinessperformanceindicatorsmightbemonitoredonanongoingbasis,itwouldalsobeusefulfortheadviserfirmtoconsidersomeparameterswhichmightbeappliedfortheongoingmonitoringofaplatform’sfortunes.Herearesomeexamplesoffactorswhichmightbeconsideredforongoingmonitoringfromaproviderspecificangleandfromabroaderplatformsectorspecificangle.Again,thistypeofexercisemaybesomethingthattheadviserbusinesselectstocarryoutin-houseand/orwiththesupportofspecialistthirdpartyresources.

Ongoing assessment - Indicative list of potential factors relating to a Platform

Here is a list of some factors which might be considered by adviser firms when seeking toassess/considerkeyplatformbusinessperformanceindicators,categorisedforexamplepurposesas BusinessAssessment, FinancialAssessment and SustainabilityAssessment.Again, this type ofexercisemaybesomethingthattheadviserbusinesselectstocarryoutin-houseand/orwiththesupportofspecialistthirdpartyresources.

CONSIDERING ONGOING FACTORS AND PARAMETERS

Platform Provider Monitoring Platform Sector Monitoring•FinancialPenalties•Mergers&Acquisitions• Informationsecuritybreach•Changeinfinancialstrengthrating•StrategicAnnouncements•ClientWins/Losses•Managementchange•Growth/ExpansionPlans•Product/IT–PlatformServiceUpgrades•LitigationsandLawsuits•AwardsandRecognition

• IndustryTrends•RegulatoryUpdates•CompetitorStrategy•MarketGrowth•TechnologicalDevelopments•AnalystOpinion•NewofferingsbyKeyPlayers

Business Assessment Financial Assessment Sustainability Assessment• IndustryRanking/MarketShare

• Industry&GeographicTrends

•MergersandAcquisitions•BusinessStrategy•ManagementStrength•MacroeconomicRisks•GeopoliticalRisks•Regulation•RevenueDiversification–GroupCompanies/ContagionRisks

•SupplySideConstraints

•RevenueGrowth•Profitability•TurnoverRatios•ManagementEfficiencyRatios

•CostStructure•LiquidityPosition•OperatingLeverage•CashFlowAnalysis•PlatformSpace/Sectorfailureonreplatforming

•Solvency•Brexitimpact

•EnvironmentalPerformance•EmployeeKnowledge/Training/Skills

• SupplyChainManagement–OutsourcedITfunctions

•CustomerEngagement• CSR•EthicalConduct•CorporateGovernance• InformationSecurity•AnyParentCompanyCommitmentquestions

•BusinessContinuityPlan


Access to Capital

Accesstocapitaltodeliverplanneddevelopmentactivitiesbutalsoreactin timely way to change requiredeitherquickly, and/orunexpectedly,by market pressures and changes,can be a major strength andconverselyachallenge.

Pg.16

Management

Smaller businesses mightcharacteristically have smaller, tightmanagement structures with aspecificindividualorafewindividualswithsignificantexperience,whereaslargergroupswillhaveoftenwide-ranging management structures,a compilation of experience andaccesstowiderpoolsoftalent.Theability to recruit and restructuremayalsobedifferent.

Importance of operational strength and sustainability

So,wecanseethroughtheadviserresearchexercise,withthefindingsshownearlierthatfinancialstrengthmatterstoadvisersandthatitislikelytoincreaseinimportancewheredeficienciesordifficultiesaresensed.

BacktoAKG’soverarchingraisond’etretoconsiderationoffinancialstrengthinthat:

From the customer perspective, the financial strength of companies needs to be focused atanoperational level, specificallyon thecompany that iseffecting theproductor service thatacustomerisselecting.Thisisimportant,becausefromthecustomer’sperspectiveitisthatcompany(notsomehighercorporateentity)thatneedstosurviveinaformthatmaintainstherequisiteoperationalcharacteristicstomeettheirfairlyheldrequirements.Anditisthusatthislevelthattheselectionneedsofthecustomers’advisersmustbemet.

Scale

Scalecanhaveanumberofrelevantaspects.Costefficienciesofgreaterscale,flexibilityatsmallerscale.

Disclosure & Transparency

There will be differences in thedisclosures required and also thevoluntary levels of transparencyby different business. A lack oftransparencyeitherthroughwhatisnotrequiredorvolunteered,whilstitmightnotobscureanyissues,willnecessarilybeacauseofcaution.

System Architecture

‘Future-Proofing’ has been amuchtalked about objective in recentyears and whilst this must beunderstood as impossible to everbeabsolute,itisakeyconsiderationgiven a landscape of multiple andinteracting change factors. Theseinclude customer behavioural andregulatory for example and thereis a clear need for any platformbusinesstobeabletoaccommodatethe needs of such change withinits technology architecture or toswiftlyadjusttosuch.

Aspectrumoffactors,eachofwhichtendstohaveagradationandeachofwhichmayrepresentpositiveornegativeaspectsandforwhichaplatformbusinessmaytypicallydisplayacombination.Thesemightinclude:

THE FACTORS AND PLATFORM BUSINESS MODEL TYPES WHICH MIGHT PROVIDE ELEMENTS OF COMFORT OR CONCERN

LOOKING OUT FOR WARNING SIGNS

TIGHT SMALL RESTRICTED PRIVATE NEWERBROAD LARGE DEEP CORPORATE OLDER


Pg.17

Explore pressures and where things might have gone wrong

Clearlyaquickandcatastrophiccollapseofafinancialservicescompanywouldleadtoimmediateimpactsonadvisersandcustomersexperienceofengagingwiththeproductsandservicesoftheembattledcompany.Thismayinturnleadtodrawnoutcompensationclaimsviaengagementwiththeappointedadministratorsand/ortheFinancialServicesCompensationScheme(FSCS).

Fortunately, thisworst-case scenario isa relatively rareoccurrence in theUKfinancial servicesmarket,butexampleshavebeenseeninrecentyearsincludingSIPPoperatorsandDFMs.

Ultimately where a business might be experiencing challenges with its financial strength andsustainabilityand/oroperationalcapabilityandresiliencethismightbeseeninavarietyofwarningsigns,someofwhichmightincludethefollowing:

•Lackoftransparencyinreportingofkeyfinancialdata/metrics•Indifferentperformanceagainstkeyfinancialdata/metrics•Parentalindifferencetooperationalsubsidiary•Lackofaccesstodevelopmentcapital•Inabilitytoraiseinvestmentfunds•Operationalcostcuttingwhichmightincludeorganisationalrestructuring,officeclosureorstaffredundancies

•Abruptchangesinstrategicdirectionorcorporaterestructuring•Raftofseniormanagementdepartures•Inabilitytocompleteoperationalorstrategicdevelopmentprojects•Operationalsystemsand/orservicingdifficulties•Sluggishresponsetokeyregulatorychanges•Subjectofspecific,individualregulatoryscrutinyand/orfines

Whilenotnecessarilyinisolation(morelikelyincombination)thesemightcauseconcerns.


•Thequestionofmaintainingtheexperienceforcustomersandadvisersisverymuchshownasnotanacademicpoint.

•Theeffectsoffailureorimpairment,asshowninthecaseofAvalon,areveryrealintermsoftheremovalofoperationalcapabilityofabusinesstomeetbasicandreasonablyheldongoingcustomerandadviserneeds.Andwhatifring-fencingdoesn’tplayoutinasfull,orastimelyafashionasexpected.Intheabsenceofanacquisition,andwithadministratorsinsitu,whatanxietymaystillremainoverassetsafetyandaccess?

•Similarly,theanxietycausedbyfailureofaplatform,evenifthe‘closure’isforalimitedperiod,cannotbeunderestimated.

•Anysustainedperiodwhereacustomerortheiradvisercannotaccesstheplatformandthustheirinvestmentsisamajorconcern.

•Thisismadeparticularlyworsebytheneedforadviserstocommunicate(andpotentiallyreassureclients)atatimewhentheyareunlikely tohaveall theanswers.Not leastbecausethesituationis likelytobechangingrapidlyandgiventhatmultipleparties, includingpotentiallyaregulatorandadministrator,couldbeinvolved.Also,theadvisermaythemselves,becauseoftheplatform’sclosure,beincreasinglyconsideredinthesamelightand/orwithsuspicion.Therelationshipmanagementskillsoftheadviserandclosenessofrelationshipbetweenclientandadviserinthisandtheabilityoftheadvisertonavigatesuchaproblematictimecannotbeunderstated.

•Duringthefailureorimpairmentofaplatformpartner,advisersmayberelativelypowerlesstoinfluencethedirectionofdevelopments,suchasarescuepurchase.However,thisdoesnotmeanthatsignificantextraworkwillnotberequired.Notleastintryingtoestablishwhatishappening.Thiswill include liaisonwith thedifferentparties involved,perhaps the regulatordirectlyandpotentiallyanadministrator.Theywillalsobeworkingrapidly,sooptionsandasaresult,messages,maychangedaytodayorpartytoparty.Andthentheneedtomanagemessagesout,tostaffandotherparties,andparticularlytoclientscouldbecomeafull-timejobataveryseniorlevel,withinanaffectedadvisorybusiness

Pg.18

KEY LESSONSBACKGROUND

AVALON CASE STUDYThefailureofAvalonprovidesaparticularlygoodcasestudytoarticulateinthisguide,givinglifetothekeypointthatwithoutdepthofresourceandresilience,unexpectedissuescandramaticallyimpactonplatformsustainabilityandhenceadviserandclientexperienceandcreatesignificantanxieties.

TheAvalonplatformwasprovidedbyAvalonInvestmentServicesLtd(AIS),aUKbasedcompanyheldinprivateownership,authorised,andregulatedbytheFCA.AISwasfoundedbyHarryKerrin1999andintotaltherewerearound20individualprivateshareholders.

Littlewasknownoftheabilityoftheshareholderstoprovideadditionalcapitaltofundlossesordevelopmentcosts.Thecompanyhadpostedimprovingprofitlevelsoverthefewyearspriortoitsfailure,butthebalancesheetwasalwaysfairlyminimalincomparisontothemajorityofplatformpeers.

AIS was also never the most transparent of platform operations in terms of information onitsfinancialperformanceoroperatingprogress andPillar3 capital informationwasnot readilydisclosed.

Theprincipalactivityofthecompanywasasanadministratorofinvestmentproducts.Itwasasmalloperation,withaveragenumbersofemployeesbetween2014and2016beinginthe20s.

Asat18June2015,Avalonclaimedtosupportaround46,500clients,with£300mAuA.Theclients’averageportfoliosizewasstatedasbeingaround£60kin2016.

AvalonInvestmentServicesenteredadministrationinFebruary2016afteritlostacivilclaim,relatedtoHarry Kerr (whowas subsequently bankrupted and faced fraud charges), but also broughtagainstit,byanindividualbusinessman,MichaelBennettandthedecisioncostthecompany£2m.Avalon lacked the resources to absorb this claim and resultant regulatory interventionmeanttheclosureof theplatformandthebusinessbeingplaced inadministration. Itremainedclosedand cruciallywas inaccessible to advisers and clients for a period,with a significant degree ofuncertaintycreatedastopotentiallengthofclosure,outcomes,andfutureaccesstoassets,untilitspurchaseoutofadministration.


Pg.19

STATEOFTHEPLATFORMNATION-MARKET DATA AND COMMENTARY

ForthosereaderskeentogetapottedhistoryoftheUKplatformmarketfromanassetflowperspectivewehaveprovidedhere,sourcedfromFundscape,someillustrationsofplatformflowsandassetsundermanagementonanannualbasisrunningfrom2006to2020.

Platforms have clearly been challenged from an operational perspective due to the impact of COVID-19 during the year. It isthereforeinterestingtoseehow2020YTDflowsareholding/shapingup,incomparisontopreviousyears,andthentoconsiderwhattheflowprospectsmightlooklikeforthelatterpartoftheyearandbeyond.

2020figuresprovidedbyFundscapeareassetsunderadministrationuptoQ32020. 2020figuresprovidedbyFundscapeareYTDflowsuptoandincludingQ32020.

PLATFORM ASSETS UNDER ADMINISTRATION PLATFORM GROSS AND NET SALES

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Q12

0

Q22

0

Q32

0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Q12

0

Q22

0

Q32

0

800,000

600,000

400,000

200,000

0

5,000

4,250

3,500

2,750

2,000

5,000

4,250

3,500

2,750

2,000

140,000

105,000

70,000

35,000

0

Source:Fundscape,October2020Source:Fundscape,October2020

Platform gross and net salesPlatform assets under administration

FTSEAllShareFTSEAllSharePlatformgrosssalesPlatformnetsales

Totalplatformassets


£m £m

FTSEAllShare

FTSEAllShare

Pg.20

AspreviouslyreferencedAKGhasbeenassessingtheplatformmarket fornearly10yearsandduringthistimehasseenplatformprovidersdealwithahugerangeofchallenges,somerelatedtotheperformanceoffinancialmarkets,tocompetitionandmarginpressures,throughtoindividualstrategicgroupandplatformoperationalrequirements.However,itcouldeasilybearguedthatthecurrentbusinessenvironmentismorechallengingthanatanypointinthelasttenyears.

As Fundscape’s Bella Caridade-Ferreira outlines in the next section, fierce competition, theslowdownofdefinedbenefittransfers,andthestillunknownextentoftheeconomicfalloutofCOVID-19,plusBrexitfall-out, it’sclearthatplatformshavetheirworkcutouttogrowandbeprofitable.

There’sasignificantlikelihoodthatplatformswillstruggletohitthekindofgrowthlevelstheyhaveexperiencedinrecentyearsandastheFundscapeanalysisinthenextsectionshows,thiscouldbealonger-termtrendwhichlastswellbeyond2020.

EachplatformsitsinitsownspecificsetofcircumstancesandAKG’sratingreflectsaviewonhowwellthosecircumstancespositiontheminawaythattheywouldbeabletorespondtochallengeswhichmightimpactnegativelyonthem–bethatinfinancial,operationalorserviceterms.

Thoseplatformsattheweakerendoftheratingspectrumwill likelyfindsuchchallengesmoredifficulttoovercomeandthereforeareathigherriskofsufferinginthefaceofdifficultcircumstances,relatedtothesectororexperiencedbytheplatformdirectly.

Theratingsarecompiledonabalancedbusinessscorecardbasisandassuchthereisnotusuallyoneparticularelementthathasamoresignificanteffectthanalltheotherscombined.

However, someevents, for instanceabigmarket contractionormuch loweredoverall growthexpectationwillbefeltbyallplatforms;butarelikelyimpactmoreonthoseplatformsratedatalowerlevel.Theimpactofsuchpressureswillpotentiallyleadtomoresignificantissuesforthoseplatformslesswellequippedtorespond.

Source:FundscapeasatOctober2020

Platform asset trends in 2020

Fundscapereportedthefollowinginrespectof2020assetgrowth.

IMPACT OF FACTORS SUCH AS MARKET VOLATILITY, THE SLOWDOWN IN DEFINED BENEFITTRANSFERSANDTHEMACRO-ECONOMICENVIRONMENTONCURRENTPLATFORM PROVIDERS


Q419 Q220 Q320 Q320Grth £m

Q320Grth %

YTD Grth £m

YTD Grth %

Aegon1 145,763.8 142,660.6 144,338.0 1,677.4 1.2 -1,425.8 -1.0HL2 103,734.0 101,774.0 104,600.0 2,800.0 2.8 866.0 0.8Fidelity 92,657.3 91,184.6 92,261.0 1,076.4 1.2 -396.3 -0.4StandardLife3 62,561.3 61,166.2 63,050.0 1,883.8 3.1 488.7 0.8QuilterWealth 58,557.2 57,460.4 58,933.7 1,473.3 2.6 376.5 0.6AJBell 47,200.0 47,700.0 49,700.0 2,000.0 4.2 2,500.0 5.3Transact 39,312.0 39,711.0 41,093.0 1,382.0 3.5 1,781.0 4.5Aviva 29,084.7 30,181.3 31,353.0 1,171.7 3.9 2,268.3 7.8JamesHay 27,587.2 26,354.0 26,932.7 578.7 2.2 -654.5 -2.4Nucleus 16,141.3 15,824.6 16,103.2 278.6 1.8 -38.1 -0.2ATS4 16,207.8 15,707.0 16,030.0 323.0 2.1 -177.8 -1.1Ascentric 16,100.0 15,472.5 15,617.7 145.2 0.9 -482.3 -3.0Advance5 15,575.0 15,578.0 16,103.3 525.3 3.4 528.3 3.4TPI 10,442.3 11,216.2 12,071.7 855.5 7.6 1,629.4 15.67im 10,705.6 10,747.9 11,024.4 276.5 2.6 318.8 3.0Parmenion6 6,960.3 7,296.6 7,535.4 238.8 3.3 575.1 8.3Praemium6 1,680.5 1,802.1 1,918.9 116.8 6.5 238.4 14.2Nextthree7 19,995.0 20,570.0 21,525.0 955.0 4.6 1,530.0 7.7Total 720,265.3 712,433.0 730,191.0 17,758.0 2.5 10,325.7 1.4

1 AegonARCandAegonPlatform(ex-Cofundsbusiness)nowreportedtogether.2 HargreavesLansdownreportsinarrears.AssetsareactualbutsalesareestimatedforQ220.3 IncludesElevatebutexcludesParmenion.StandardLifepublishesitsresultseverysixmonthssofiguresareestimated.4 ATSfiguresestimatedforQ220.5 AdvanceformerlyknownasZurichIntermediaryPlatform.Theacquisitionwascompletedon1stMay2020. IncludesEmbarkfigurestoo.

6 ParmenionandPraemiumaddedfromQ419.7 Hubwise,NoviaandRaymondJames.

Pg.21

Intermsofflowprojections,givenfierceongoingcompetitionforbusinessintheplatformsectorandongoingregulatoryreview,furtherheadwindswilllikelybeexperiencedbyplatformoperators.Thiswillbeexacerbatedshouldtheinvestmentmarketsexperienceconsistentlyvolatilebehaviourmovingforwardand/ortheimpactofapost-COVID-19recessionaryeconomybeseen.

Fundscapehasprovidedsomeassetgrowthprojectionstoinformthediscussion/debate.

FUNDSCAPE PLATFORM PROJECTIONS

Source:Fundscape,October2020

2019 (actual)

Q220 (actual)

2021 2022 2023 2024 2025 Growth rate

Pessimistic 713,092 730,000 788,400 851,472 919,590 993,157 1,072,609 8%

Realistic 713,092 760,000 851,200 953,344 1,067,745 1,195,875 1,339,380 12%

Optimistic 713,092 800,000 944,000 1,113,920 1,314,426 1,551,022 1,830,206 18%


THE NEXT FIVE YEARS – FUNDSCAPE PREDICTIONS

ForecastsareallthemorehazardousasweadapttoanewlifeunderaCOVID-19pandemicandtheunknowneconomic implications.The situationwill be compoundedby theUK’s seeminglyinevitableexitfromtheEUwithoutadeal.Butregardlessoftheseissues,peoplestillneedtosaveandprepareforthefuture.

Pension freedomsgeneratedasteadystreamofdefinedbenefittransferbusiness forplatformsuntilearly2019.Low-hangingfruithasbeencaughtandtransferred,buttheprohibitivecostofPIinsuranceandtheFCA’sregulatoryfocushavealsoactedasamajordeterrentforadvisersandthepipelinehasslowedtoatrickle.

Nonetheless,thereisasignificantstreamofhouseholdassetswaitingtobeminedoverthenext20to30years.Householdwealthstoodat£6.7trnatend2018withjust£601bnonplatform.Theproportionofwealthincashanddepositsroseto25%(£1.7trn),andtechnicalreservesandassetsinpensionschemeshadshrunkslightlybutrepresentedasignificant55%(£3.7trn)ofhouseholdfinancialwealth.Thebulkofthesepensionassetsandreservesisinthehandsofpeopleintheir50sandabove,sotherewillbeasteadystreamofpensionassetscomingonplatformoverthemidtothelongterm.

Intheshortterm,environmentalfactorsarelikelytoweighontheindustry.TheBrexitquestionaffected sentiment in 2019 and investors sat on the sidelines.The decisive election result inDecember2019unlockedthatmoneyandledtosubstantialflowsinthefirsttwomonthsof2020—grosssaleshitarecordhighof£36bninQ1—beforethevirushithome.

Re-setISAandpensionallowanceshelpedtogeneratenewbusinessinQ1andearlyQ2.Quarterlyflowsremainedbuoyant,butasthesecondquarterunfoldednewmoneywashardertocomebyandlockdownmadeitdifficulttofindnewclients.Thethirdquarterliveduptoourfearsandbusinesswasflatterthanithadbeeninmanyyears. Pessimistic scenarioHistoricalanalysisshowsthatevenduringdifficultperiods,industryassetscontinuetogrowatamodestrate.Ourpessimisticscenarioassumesaforwardgrowthrateofjust8%,puttingassetsoncoursefor£1trnby2025.Inthisscenario,alongrecessionislikelywitheconomicrecoveryslowandsluggish.Thegovernment’sresponsetothepandemicwillleavetheBankofEnglandlittleroomformanoeuvre.

The outlook for platforms could be eased by the steady trickle of pension business and theprecautionarymotivetosaveandinvest.However,higherinterestratesandeconomicuncertaintycould keep investors away from investments. Interest rate rises would also put pressure ondisposablehouseholdincomeanddepresssavingslevels.Platformactivitywillbesubdued.

Realistic scenarioTherealisticscenarioassumesaforwardgrowthrateof12%takingassetsto£1.3trnby2025.Thisfiguremayseemhigh,butexperienceshowsusthatevenintheworstmarketconditions,aftertheinitialshockassetsresumegrowthatamodestrate.Thisscenarioassumesthattheeconomyexperiencesamainlyv-shapedrecoveryalthoughinsomesectors,likeaviation,itwillbeu-shaped.

Optimistic scenarioIntheoptimisticscenario,assetswillgrowataround18%toreach£1.8trnby2025.Foranoptimisticscenario, this growth rate is unusually low, but given the unprecedented pandemic situation aconservative approach is best. In this scenario, theUK has come through the pandemicwithmodesteconomicgrowthandhasalsosuccessfullyconcludedBrexitnegotiations.ThefalloutfromBrexitwillhaveamoremoderateimpactontheeconomy,althoughanundercurrentofgeopoliticalriskwillbeeverpresent.

Fundscape Platform Projections, £m

Bella Caridade-Ferreira, Chief Executive Officer of Fundscape

https://fundscape.co.uk/

Pg.22

KEY POINTS•Platformstrengthcanattimesbeanunder-consideredfactorinadviserduediligence•Financialstrengthisnotahypotheticalrisk•Duediligenceisanongoingprocessandrequiresregularconsideration•Therearecoreapproachesandkeyelementsthatadvisersshouldhaveinmindwhenpreparingaframeworktoconductduediligence

•Theoutlookwithinthesectorhasmorechallengesthanithasforsometime


“A key point of this guide is that financial strength is not a hypothetical risk. Given the stresses and strains on platform providers caused by Covid-19, that point cannot be emphasised strongly enough.”


https://jonbakerconsulting.co.uk/

AKG Financial Analytics LtdAndertonHouse,92SouthStreet

Dorking,SurreyRH42EW

+44 (0)1306 [email protected]

AKGisanindependentorganisationspecialisingintheprovisionofassessment,ratings,informationandconsultancytothe

financialservicesindustry

©AKGFinancialAnalyticsLtdISSUED 19 November 2020

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Documents

Financial & Operational Strength – its role as a