Is tech consolidation creating wealth management risk?

The outsourced technology platforms that underpin the UK’s wealth and asset managers are increasingly key to movement in the market, as mergers and acquisitions (M&A) concentrate power among a handful of major players.

FNZ’s deal to buy rival provider GBST at the end of July for around £150 million ended a three-way battle which also included Bravura and SS&C and saw a 94.9 per cent premium to the closing price of the company’s shares on 11 April, when Bravura made an initial approach.

Earlier that same month, FNZ bought UK wealth management tech firm JHC, while in May, IRESS acquired QuantHouse, adding to its takeover of Financial Synergy in September 2016 and Pulse a year earlier.

Last June, investment manager Invesco bought digital solutions provider Intelliflo, which itself made a deal for i4c at the start of August.

Tanks on lawns

In a recent blog, Platforum’s research director Richard Bradley highlighted that at the end of 2017 the top 10 European platforms had a market share of 56 per cent, which had risen to 61 per cent by the end of 2018, rising to two thirds once all the current transactions obtain regulatory approval.

However, he went on to point out that despite much talk of consolidation over the years, the UK platform market remains fragmented, comprising approximately 30 business to business (B2B) platforms and a similar number of direct to consumer (B2C) platforms.

“Despite a few acquisitions here and there, with Zurich’s platform being the latest offering on the market, the number of platforms has remained remarkably stable for the last decade,” stated Bradley. “Where we are seeing movement is in the underpinning technology – platforms have been gradually shifting onto four main technology providers [FNZ, GBST, Bravura, SS&C].”

Mike Barrett, consulting director at the Lang Cat consultancy, argued that there is a battle for control of advice propositions being waged.

“IRESS and Intelliflo are both growing out their tech offering, parking their tanks on the lawns of the established platforms and asset managers – if they’re successful, it essentially relegates the providers to product administration and custody roles.”

Too big to fail?

He warned of the potential for concentration risk, as FNZ potentially now accounts for about 60 per cent of the market. “Although there’s not necessarily a lack of choice for advisers, it’s more a question for regulators, as these companies are not supervised in the way a similarly large provider is.

“Are they becoming too big to fail?” Barrett asked, noting the significant impact across the market if a provider ran into problems.

Chris Pitt, head of propositions at wealth management software firm Focus Solutions, agreed that concentration of risk is definitely an issue, with stricter regulation seeming inevitable.

“Maybe the industry will reach the point, as has happened with the big six banks, where the regulator has stepped in to reverse the trend by getting some of the largest banks to sell off parts of their branch networks, splitting their investment and retail operations, etc.

“FNZ is a good example [of getting too big to fail] and it will be interesting to see how it handles the integration of their last few acquisitions,” he continued, noting that about 20 years ago there was a lot of consolidation of core banking software by companies like Misys, but many years later they were still marketing separate solutions, often competing against one another.

Ben Hammond, principal consultant and platform specialist at consultancy Altus, agreed on the too big to fail point, especially since most asset and investment managers have their technology stacks on a handful of large providers.

“It feels as if there aren’t that many big deals to be done in this sector, following FNZ’s recent spree,” he stated, noting that the Financial Conduct Authority (FCA) is yet to comment officially, but if competition or customer service become affected, then that could change.

In March, the FCA released findings from its investment platforms market study, although this was more focused on improving the ease and cost of consumers switching between them, rather than any wider industry regulation.

Moving legacy systems

With the difficulty of upgrading legacy systems and integrating infrastructure, financial services firms - from insurers to investment managers - are increasingly making M&A decisions based on shared tech providers.

“It’s certainly an easier job acquiring and migrating systems if providers share the same tech stack and platform,” commented Barrett.

Pitt compared changing legacy back office systems to having open heart surgery, meaning that a shared tech provider was bound to have an impact when considering the competition.

“However, our experience shows that whilst this will influence decisions, it is becoming less of an issue as APIs [Application Programming Interfaces] become more widely used and integration hubs are starting to emerge where communication can be made via a defined structure.”

Nick Eatock, executive chairman at Intelliflo, said that three years ago the business launched its own APIs, opening up access to Intelligent Office to give developers and clients the flexibility to interact with the system in whatever way they like, including the ability to display the information in their preferred version within their own solutions.

“In terms of the future, it’s my belief that Open Banking is going to change the financial services industry forever – there is a perception amongst some advisers that it has nothing to do with them and brings no benefit, but that is something we’re challenging.

“Open Banking can bring advisers valuable access to a set of information which is normally really hard to get – it takes the heavy lifting out of getting this data and keeping it up to date,” added Eatock.

Hammond noted that the industry currently isn’t ready for the sort of data sharing instituted under Open Banking, given intraday trading isn’t yet the norm for most providers.

“Without real-time transactions, it would be difficult to implement,” he explained, adding: “Currently, even integration between asset managers with the same tech providers can be tricky, given that what were essentially the same bits of kit mature and change within different organisations over time.”

Back versus front office

Most of the recent consolidation has been with back office providers which have, in some cases, extended their solution to cover some front office functions.

“Regulation and compliance has driven the need to be more efficient, or more competitive and hence the drive to achieve scale and the use of technology to cut costs,” pointed out Pitt. “Now MIFiD and GDPR are ‘complete’ there is no regulatory driver forcing people to review their systems at the moment.”

He argued that this has given firms the opportunity to pause and look at what the business can do to improve client services. “We believe that this will allow companies to engage in more strategic front office projects that will provide real benefit to end clients and the firm’s staff.”

Eatock agreed that back office systems have come a long way over the last few years. “Our Intelligent Office software now powers far more than back office functions, having evolved into a total business management system specifically tailored for the financial intermediary industry.”

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