14 December 2010

05/12/2010

Tony Klim, a pioneer of the UK wrap industry and now CEO for EMEA at Bravura Solutions, talks about how owning more of the value chain isn’t always better and how the use of shared infrastructure can help take the industry forward.

Looking to secure a greater portion of the end to end value chain, a plethora of companies have dived into building their own wrap platforms under the often mistaken assumption that ownership of the platform would generate a valuable revenue stream going forward. The result is that the UK now has a number of platforms offering quite similar features, and the development and operational costs have been widely acknowledged as excessive. The question is, if all the platforms are similar, how do you offer competitive advantage?

There may have been some first to market advantages, but there are around 20 different wrap platforms in the market today, and the underlying service itself is now fast becoming a commodity, an enabler of a branded business proposition. As the market matures, differentiation in the platform space will be less about features and more about operational efficiency. From a distributor or consumer point of view, the wrap platform itself is just one component of the infrastructure that delivers an overall proposition; and this overall proposition is more likely to be successful if it is based on traditional attributes such as trust, quality of advice and relationship management.

Competitive or commodity?

It stands to reason that if the industry were to utilise just a few wrap platforms, this smaller number of strong industry initiatives could allow us to see greater take up and significantly improved operational efficiency across the board.

So why are fund managers and life companies reluctant to work together to develop and deliver shared infrastructure for wrap platforms? Much of the platform industry is still working under the premise that proprietary platform technology itself offers a real competitive advantage; however it’s the innovative few who have realised this is an interim phase and that shared wrap infrastructure, particularly when hosted, enables greater cost, time and operational efficiencies. By channelling funds and resources away from developing individual wrap “engines” which are in the end very similar, and instead sharing this investment of time and money, the industry can achieve lower costs for consumers – or see higher margins for product providers and distributors.

It is important to recognise that sharing a commodity infrastructure like a platform, does not necessarily mean shared ownership of the business model and overall value chain, or result in reduced profit. Using a shared service platform also does not stop distributors individually branding and tailoring their own services, determining their own pricing model or negotiating their own deals with individual fund managers across the platform. Technology solutions today allow organisations to develop, maintain and modify the propositions offered to customers, as well as how they are able to utilise the platform, ensuring it continues to look and feel like their own unique offering.

Today the UK platform industry requires more communication and collaboration between major players. Parallels can be drawn in the banking industry with models such as BACS, CHAPS and VISA where banks saw the need to align in order to deliver payments as a commodity across multiple providers, thereby benefiting customers and the entire industry alike. The banks now compete in other areas of customer service, rather than through the payments infrastructure itself.

The lack of forward thinking experienced in the wrap platform industry is partly due to a limited understanding and acknowledgement from industry players as to what is competitive and what is commodity. Or what in the value chain is revenue generating and what isn’t. Forward thinkers will also be able to see that what is competitive now, could likely be a commodity in the future; therefore, more cost effective methods of development and implementation should be identified and adopted, before too much money is spent.

This issue is also clouded by the fact that we are seeing a fundamental shift in the way traditional financial services players are positioned in the overall value chain. In line with other industries, product providers such as the traditional Life and Pensions providers are recognising that there is a reducing margin in the manufacturing of financial products and they are moving up the value chain towards distribution. Similarly, distributors such as some of the quality IFAs are seeking to take more control by packaging their own products; in some cases even creating their own mutual fund propositions from industry standard components. In both cases, platforms have become an enabler. This changing of market roles is leading to even more uncertainty over the need for ownership of a platform.

Case study: The Transfer Agency market

If we look at the UK Transfer Agency market, we see that it has evolved to a position where a large part of the mutual fund industry is serviced by a few large Transfer Agency service providers such as Bank of New York Mellon and IFDS. These service providers effectively provide the record keeping and distribution support functions allowing the fund managers to focus on their core competencies and skills in fund management. This wasn’t always the case. Many smaller organisations in the funds industry are now looking to the larger platform providers to fulfil their technology and administration needs, a position which sees them reaping the benefits of greater efficiency and a better focus on what the customer really wants. Of course there will always be a case for larger players to run their own technology platforms, but this is very much a factor of scale and in some cases the sometimes perceived need to maintain control, rather than any real competitive advantage.

Lessons learnt: The foundation for the future

When wraps were introduced to the UK there were high expectations of the revenue that the platforms themselves would generate for financial institutions. Success stories from countries such as Australia are leading to a rush by UK players to get involved in the wrap market. However, Australia had a very different set of regulatory pressures driving the adoption of platforms. The UK does not have compulsory pensions, and no matter which direction personal accounts take, it’s unlikely the UK will see the same take up of wrap as that experienced in Australia. Most platform volume in the UK is still based on straightforward fund supermarket business rather than the all embracing wrap account proposition.

Australian financial services companies and distributors have come to the realisation that owning a wrap engine doesn’t necessarily offer a competitive advantage. Instead, this lies in the client offering rather than the technology and Australia is evolving towards a model of just a few core infrastructure platforms. This realisation offers the UK industry some valuable lessons, in that proprietary technologies cannot be relied upon to generate revenue. Perhaps a lesson the UK funds industry should follow?

Differentiating yourself as a key technology player

As platforms move towards becoming a commodity service providing common features to all, the focus of technology providers must be on cost and speed of implementation and the ongoing cost of operation.

Technology providers must show a wilingness to work with the rest of the industry to develop the best solutions. Getting the most value out of wrap platforms themselves will depend on the industry’s ability to share knowledge and ensure that the customer’s needs are addressed in the most cost effective and efficient way.

The UK industry has incurred some extravagant costs in implementing and operating its first generation of wrap platforms. In some cases, this was due to platform providers using a technical architecture that tried to aggregate existing legacy products, as well as supporting the complex nature of wrap offering itself. The second generation of UK Wrap platforms will be much better placed to succeed once the industry recognises that efficiencies can really only be achieved by developing new products and services within a common overriding wrap technical architecture. This concept of a “pure wrap”, rather than an aggregation platform, could well be the key to success as it can result in a significantly lower cost base.

Conclusion

The realisation that technology, as an enabler, does not always necessarily provide the competitive advantage will be important in determining the most successful operating models in an evolving market. Similarly, a recognition that the platform business itself may not be able to deliver sufficient revenues as a standalone operation in order to justify a large number of providers, is likely to result in an industry where a small number of highly efficient platform service providers deliver a low cost but vital component of the distribution value chain. Inevitably, this could see the demise of some of the expensive first generation platforms based on product aggregation. Low cost commodity infrastructure for wrap should instead allow distributors to focus on their real differentiators – excellence in advice and relationship management.