The advice industry has made effective use of technology over the years, to enhance and speed up the process of investment.
Platforms in particular have become a fixture, offering convenience and accessibility, to name a few benefits. It is unsurprising therefore that many advisers started to develop an interest in creating their own in-house version.
By 2021, interest had rocketed. Research by adviser platform Seccl, in 2021, revealed that nearly half of advisers (44%) were considering setting up an in-house platform.
More recently, research from NextWealth indicates that going down the in-house platform route is increasingly likely for large advice firms and private-equity-backed acquirers. It revealed that businesses with assets under management (AuM) of between £250m and £499m ($624m, €574m) were the most interested in this option, with more than a quarter (28%) having plans in place.
This was up from 2021, when 18% of firms with AuM of £250m or more reported intentions of building their own platform.
International Adviser spoke with NextWealth, JustFA, Platform One, Blacktower and GSB Capital for their views on what’s involved when looking to set up an in-house platform – and what advisers need to watch out for.
Just a dream?
For firms interested in setting up an investment platform – a reality check may be necessary first.
“Through our ongoing research into platforms we repeatedly hear from financial advisers who dream of holding all client assets on one in-house platform to improve operational efficiency,” said Heather Hopkins of NextWealth. “Unfortunately, this is unlikely to be a reality.
“Adviser firms who are already running their own platform tell us they still use other platforms, particularly for clients with complex requirements. Moving assets always has to be in the client’s best interest. This isn’t always easy to evidence.”
And for those who do still want to set up their own platform, there is a considerable checklist of things to consider, according to Dean Kemble, chief commercial officer at GSB Capital.
Kemble added: “If looking to set up an in-house investment platform, advice firms should be wary of several potential factors.
“In-house investment platforms are subject to a range of regulatory requirements, including licensing, disclosure and ongoing reporting obligations. Advice firms and advisers need to ensure they have the necessary licenses and comply with all regulatory requirements to avoid the risk of penalties or legal action.”
Technology is an issue too, as Kemble explains: “An in-house investment platform requires a significant investment in technology and infrastructure. Advice firms and advisers should carefully assess their technical capabilities and ensure they have the necessary resources to develop and maintain a robust, secure and user-friendly platform.”
Clients, costs and conflicts of interest
Reputation, costs and conflict of interest are also priorities for consideration.
“The performance of investments made through an in-house platform will directly impact clients’ financial outcomes and the reputation of the advice firm or adviser,” says GSB’s Kemble. “Advice firms and advisers should have a rigorous investment selection process, monitor investment performance regularly and have a plan to address underperforming assets.
“In-house investment platforms can create a conflict of interest if advisers prioritise their own investment products over those of other providers.
“Advice firms and advisers should have clear policies and procedures in place to manage conflicts of interest and ensure that clients’ best interests are always put first.”
‘Deep pockets’ required
Advisers keen to set up their own platform may also have to spend a significant sum, GSB’s Kemble suggests.
“Developing and maintaining an in-house investment platform can be expensive, requiring ongoing investment in technology, staff, and regulatory compliance,” he added. “Advice firms and advisers should carefully evaluate the costs and potential profitability of an in-house platform to ensure that it is a viable business proposition.
Next Wealth’s Hopkins points out some financial and technological obstacles involved in setting up an in-house investment platform as well.
“Just because technology exists that makes having an in-house platform possible doesn’t necessarily mean it’s the best decision for an adviser firm or their clients,” Hopkins said. “Advisers considering launching their own platform need to be prepared to lose money in the first few years. The set-up costs and legal requirements can be significant. It’s necessary to recruit expert technical resource to get the platform operational.
“Also, the cost of the technology that drives the platform carries a fee that has to be paid from the start. This means firms wanting to enter the platform arena will need deep pockets from the start.”
Hopkins also says that while the tech makes it attractive, setting up your own platform is not as easy as it might seem.
“Technology is making white-labelling and the adviser-as-platform model more attainable,” she added. “Advice firms can see the benefits of an in-house platform to boost operational efficiencies, improve the client experience and exert more control over price and to capture margin.
“However, scratch the surface and many advisers soon realise that running their own platform comes with a hefty layer of governance and oversight. For large firms, this can be manageable but having to jump through regulatory hoops on a daily basis is making smaller firms think twice about taking this route.”
Taras Rybak, strategy director at JustFA indicates financial and other potential downsides too.
“For many advice firms, the idea of setting up an in-house investment platform might sound attractive, as many companies are looking to capture additional profit margins in the value chain,” Rybak said. “However, the amount of cost and effort involved can be significantly underestimated by many.
“You can use white-label software solutions and outsource custody. But you still will need to employ a development team, be responsible for monitoring third parties and provide ongoing support to all clients. In addition, as regulatory permissions will still rest with the advice firm, it can put the balance sheet under pressure.
“For the ‘adviser-as-platform’ model to work, you must have a scaled business in advisers and assets, at least £2bn assets under administration or more, and be able to commit significant capital and resources. So, for most small and mid-size advice firms, there could be other ways to deploy capital more effectively, even if it’s as simple as expanding the capacity of advisers or client acquisition.”
The sheer amount of work involved in running an investment platform could be off-putting for some advice firms.
“The list of operational and regulatory requirements necessary to run a platform will be overwhelming to an advice firm looking to set up their own system”, says Alex Cowan-Sanluis, chief executive of Platform One. “The reality is that running a platform is no easy task.
“On top of all the added functions, controls and safeguarding assets, there’s new regulatory capital calculations, the shift in legal agreements between firm and client, demonstrating the suitability of the house solution over another in the market and maintaining independence in that view.
“There’s the cultural shift too, with an expansion of personnel and potential reputational impacts if something goes wrong. The list goes on and on. Plus, the best way to put your head above the parapet with regulators and to have them diving into the depths of your business operations is to tell them you want to run a platform.
“What’s also often forgotten in the narrative around this debate is where custody lies. Platform companies are typically determined to be the custodian of client assets and fix a vice-like grip on them. However, many advisory firms don’t want to be reliant on a single custodian, particularly international businesses where it makes sense to have custodians in multiple jurisdictions.
“There’s no real reason custody can’t be as integrative as a back-office system or a cashflow modelling tool. Running an API-based ecosystem that integrates with other technology is the modern way to run fintech firms but custody remains the end-game for many providers in the platform arena. Yet it doesn’t have to be – other solutions exist to pull platform technology through, like in software as a service arrangement, with the custody held elsewhere.”
Nowhere to hide
Cowan-Sanluis also believes that the introduction of Consumer Duty will become also a major factor, which could add to the pressure on firms running their own in-house platform.
“Consumer Duty is fundamentally about offering clients value for money and ensuring they experience good outcomes. ‘Adviser as platform manufacturer’ can be a fantastic solution for both firms and clients but the commitment and resource necessary to ensure good outcomes cannot be underestimated.
“Having to play the ‘blame game’ isn’t ideal when a traditional third-party platform provider goes through a phase of bumpy service, but when you’re running your own proposition there truly is nowhere to hide − whether that’s from clients or indeed the regulator. It’s no easy decision to take on all the extra responsibility and regulated functions that running your own platform involves, particularly with the incoming Consumer Duty placing greater pressure on regulated entities.”
While GSB’s Kemble sees potential difficulties arising from the introduction of Consumer Duty, he also sees opportunities.
He added: “On one hand, Consumer Duty could make it more difficult to run in-house platforms as firms will need to demonstrate that they are acting in the best interests of their customers. This could require firms to invest more resources in due diligence, monitoring and reporting to ensure that the investments offered through their platforms are suitable for their customers and are performing well.
“Conversely, Consumer Duty may also encourage more firms to set up in-house investment platforms as it places a greater emphasis on the need for firms to act in the best interests of their customers. Firms that have control over the investment products offered through their platforms may feel better equipped to ensure that the products meet the needs of their customers and align with the firm’s values.”
While there are downsides and challenges, the advantages of setting up an in-house platform may still be worth considering.
John Westwood, group chairman at Blacktower, said: “Despite the increased cost implications and considerable groundwork needed to set up an investment platform, the benefits of having such a facility in-house are significant, from both a business and client perspective.
“Developing bespoke portfolios allows firms to provide their clients with investment solutions that are tailored to their risk appetite and financial objectives.
“Advisers are given the opportunity to become very familiar with the products on offer and in turn, are better equipped to help their clients achieve their goals.”
A minority of the market
While Seccl’s and Nextwealth’s respective research revealed significant appetite for setting up in-house platforms, Platform One’s Cowan-Sanluis says there is little concrete evidence of this to date.
Cowan-Sanluis said: “Adviser as platform manufacturer has been a big talking point over the last couple of years but, aside from a few larger deals, not too many have come to fruition. In fact, research from the Lang Cat found 5% of UK advisory firms have proceeded while another 4% are actively considering it, which represents a minority of the market.”
He says an alternative could provide a more suitable route for some advice firms.
“We see that many firms want to gain further control of their platform solutions without going ‘the whole hog’,” he added. “For example, white labelling their platform services by painting the software in their brand and customising the adviser and customer journey to best suit their proposition are the first couple of stages in gaining that additional control. This can be the best way to start the journey and glean greater insights into what running a platform actually entails.
“Then comes a greater responsibility of applying for regulatory permission to be a platform service operator, which involves running the first line of administrative functions to support the platform. That means the platform provider becomes a supplier of technology and custody services to the advice firm.
“As a final step the firms can take on custody permissions and so use the platform operator as a technology provider only. It may be that many firms prefer to commit as far as the first few steps and choose not to progress all the way to taking on custody permissions as they realise the immense responsibilities that involves.”
‘Bigger things to worry about’
Cowan-Sanluis does not envisage that the emergence of in-house platforms will impinge on platform territory.
He said: “In-house platforms are likely to be the preserve of very large advice firms for which their proposition and scale can make sense. Otherwise, it’s unlikely this theme will come to intrude on many others in the market.
“Many firms will test out the process through some level of white-labelling or control gain by taking on some administrative functions, but we’ll have to see how many adviser businesses take on the full responsibility of in-house platforms. Existing platforms should have bigger things to worry about, like the potential for blockchain technology to disrupt standard wealth-management processes if they do not catch on quickly enough.”
However, NextWealth’s Hopkins points to changes in the advice industry.
She added: “Existing platforms are in a highly competitive space, so any increased competition is challenging. However, many are evolving to meet the specific demands of advisers. The fact that new technology is opening access to in-house platform development is probably a strong catalyst for change within existing platforms. They realise they need to up their game to make sure they can deliver what their customers want.
“Part of the driving force behind advisers wanting to build their own platform is frustration at the operational inefficiency within adviser businesses. The view is that old model platforms can’t support the requirements of a modern, data driven financial advice firm.”