The financial case for adopting a white-label platform; a no-brainer for consolidators?

The wealth platform world is at a tipping point; the 30-odd legacy platforms in use face an increasingly hostile environment where only the largest and well-architected will survive. The survivors will share the spoils with challenger platforms based on a modern technology stack underpinned by APIs to resolve interconnectivity and integration.  The FT ran an article in January with the headline 'Platforms must adapt or face extinction’. The problem with a significant majority of legacy platforms is that they won’t be able to adapt quickly enough because the downward pressure on platform fees will reach a point when the cost of providing platform services will exceed the revenue. Altus’s research on platform profitability shows how the cost of running a platform has gradually declined from over 50bps in 2011 to 18.5bps in 2021. There is limited headroom for further reductions and there will come a point within the next 18-24 months when the cost of running a platform will exceed the revenue and dominoes will fall. Several factors contribute to this squeeze on margins:

1. Saturation of the Market: The market is crowded with numerous platforms competing for assets that are not growing fast enough to achieve economies of scale.

2. Lack of Differentiation: Legacy platforms lack meaningful points of differentiation, akin to choosing between “pots of white paint”

3. Integration Issues: Inefficiencies arise from poor integration with CRM systems and other tools, leading to duplicated efforts and a subpar investor experience.

4. Changing Adviser Preferences: Larger firms and consolidators are increasingly attracted to the idea of having their own branded platforms to capture more value.

5. Simplified Migration Process: The process of switching platforms has become more streamlined, with emerging solutions for automated data migration.

6. Cost Synergies: Consolidators see significant appeal in saving between 5 and 10 basis points in platform fees.

The alternative gaining traction among larger firms is the adoption of white-label platforms, where they can customise the proposition, control the user experience, and potentially earn a portion of the platform margin. Research from Nextwealth indicated nearly half (47%) of financial advisers in businesses with £250m or more in assets under advice say they plan to launch a platform in the next three years. Skerrits, Atomos, TPO, P1, Just IFA, Fairstone, Tatton, Fidelius, Ascot Lloyd, and others have taken the plunge. Schroders Personal Wealth announced its intent to launch its platform in the summer to provide custody of investor assets.

The white label proposition in a nutshell is a partnership between:

1. The Platform Service Provider (the core platform technology and custody services). Think of Seccl, Hubwise, Advance by Embark, P1, Fusion Wealth, FNZ, et al.

2. The Platform Operator (the firm adopting) is responsible for the overall management and operation of the platform and the client interface, communications, and proposition.

Pros:

1. One platform for DFMs, advisers, and execution-only investors.

2. Control over Investor and adviser experience.

3. Control of proposition and price.

4. Operational efficiency and cost saving. Adopting a primary platform will enable fee reduction as assets are concentrated. A big win for consolidators.

5. Risk reduction through digitisation, workflow automation, and   APIs to enable widescale integration.

6. Technical and business agility plus access to AI and Machine Learning technologies will have a transformative impact on our industry. SJP is an early adopter using AI to support face-to-face advice.

7. Enhanced compliance with regulation – through automation and Machine Learning.

8. Valuation multiple increase.

Cons:

1. Additional FCA permissions and greater responsibility, client money, and CASS.

2. Increased governance.

3. Increased capital adequacy provision.

4. Additional headcount for first-line support, platform operations, and platform onboarding.

5. More effort for advisers to move the platform with no immediate reward. Re-platforming is not without risk.

6. Disturbance for investors, new user interface, etc.

7. Adopting an existing (primary) platform that is based on a modern tech stack could deliver many of the same benefits.

8. Inertia. Not enough pain to overcome the fear of re-platforming?

The financial case for adoption is pretty straightforward, modest increased operational costs set against larger cost savings on legacy platform fees. Assuming no workforce substitution (conservative) the ongoing costs could be in the region of £0.25mn to £0.5mn. By far the largest cost savings result from fee differential. White-label platforms can offer a very attractive fee model of circa 10bps for assets on the platform of £1bn. For assets approaching £10bn, it's feasible to negotiate platform fees of between 6bps and 7bps. Depending on the number of legacy platforms and the relative asset concentration the cost saving will be in the 5bps to 10bps territory. Assuming £5bn of assets are migrated this equates to a year-on-year saving of between £2.5mn and £5.0mn. These pretty punchy numbers easily dwarf the increased operational costs.

There is another potential benefit of taking a share of the platform fees and not passing all the cost savings on to investors. This could be in the £1mn to £2mn territory depending on what percentage of fee reduction is used to inflate profits. This option is like Marmite in the advice community with polarised views for and against. I believe the economics are compelling enough without taking a clip on the platform fees and having to explain to investors why.

The case for adoption for consolidators is, in most cases a no-brainer. The cost savings from legacy platform fee reduction are likely the most compelling because of the number of legacy platforms they operate. Higher platform fees; and not being on the keenest rate card because of asset fragmentation, make this use-case financially lucrative. Plus, it will make future acquisitions easier and drive higher multiples when the portfolio is ultimately sold. Cost synergies will be higher, integration easier and benefits will flow to the bottom line quicker.

At this point, you may wonder how long it takes to adopt a white-label platform and get assets moved across. Timescales of 4-6 months for the initial adoption (providing the out-of-the-box functionality is selected) are doable. This is followed by adviser onboarding and asset migration. Timescales vary depending on the approach taken but it's feasible to have the bulk of addressable assets migrated in a 24–36-month period whilst adding additional features and functionality in parallel.

Comparing what Elon Musk has done with SpaceX with the emergence of white-label platforms may seem outrageous. SpaceX has enabled cost-effective space exploration, utilising reusable rocket technology, significantly reducing launch costs. White-label platforms aren’t rocket-propelled but share many of the same characteristics:

1. Innovation and agility.

2. Technological advancements.

3. Increased commercial opportunities.

4. Rapid launch capabilities.

5. Space tourism – not so much.

There are two no-regrets decisions large advice firms and consolidators could make now before margin pressures force many of the current legacy providers out of business:

1. Adopt a tech-enabled primary platform from a legacy provider that has a future-proofed technical architecture, service support, and operating model.

2. Explore the business case for white-label adoption and conduct a thorough due diligence exercise.

The FT and many commentators claim legacy providers are set for extinction. Get ahead of the game and don’t wait for the shock wave.