At a panel discussion attended by International Adviser on 30 June 2022, Morningstar chief executive Kunal Kapoor said there is a real opportunity to help advisers better deliver value to the end investors, in a landscape where advisers “have the potential to serve more clients than ever before”.

Kapoor believes that Morningstar, by leveraging Praemium’s existing platform and business, has the capabilities to help advisers with their post-RDR needs, with a greater focus on investment planning and outsourcing.

Steve Croucher, managing director of Morningstar Wealth Emea, and Mark Sanderson, managing director of Praemium UK and International, both added that the firms’ growth plans in the advice market must be underpinned by greater technological offerings.

Kapoor believes there is an “urgency” in advice-tech due to the fact that, despite advances in the last decade – also boosted by pandemic – the level of technology available to financial advisers “is not where it should be”.

Advisers in focus

Technological development is a big priority for Morningstar post-acquisition. The firm is seeking greater investment in the technology the Praemium platform can provide.

Morningstar is currently building tech teams in Edinburgh and Delhi to add to Praemium’s existing operations in a bid to expand its UK footprint.

The plan, Sanderson added, is to help advisers connect, understand and engage with clients; and this can be done by giving them the tools to be proactive.

This means that advisers should not wait around for their customers to contact them, rather be the ones initiating conversations and activities, he said.

For Kapoor, there are three areas of priority within outsourcing for the Morningstar-Praemium business: investment management capabilities; reporting as part of “communication value” advisers can offer to clients – which must include ESG; and technology.

On the ESG front, the chief executive added the company is gearing up to unveil tools to help advisers talk to clients about sustainability, as Croucher added that there currently is a “big space for education” in the market.

But positive attitudes towards providers are on the decline according to a Seccl survey, which found 69% of firms are considering parting ways with their platform.

Seccl found 68% of advice firms said their platform provider focuses more attention on winning new business than servicing existing clients and 74% agree that their teams must often perform tasks that they would expect their platform to do for them.

The report added that the advice market is “seemingly on the cusp of significant switching activity”.

Unhappiness

IA contacted Ardan International, Praemium and AJ Bell to find out if the adviser/platform relationship has hit an inflection point.

James Parsons, head of sales at Ardan International, said: “Overall, we feel advisers are happy with platforms and can see how platform technology can significantly increase efficiency. Advisers welcome a simple and transparent structure that mirrors the type of proposition found in more mature jurisdictions.

“The use of platforms has grown significantly in recent years as propositions continue to develop and advisers are able to address specific financial planning needs.”

Mark Sanderson, managing director – UK and international at Praemium, said: “I expect there are a lot of advice firms that would like to see improvements to their platform’s service and functionality. From what I’ve heard, when talking to advisers, is they are looking for better admin, better strategic alignment, a voice with a key supplier and a sense of shared responsibility.

“But they don’t want a huge increase in costs, risk and regulatory overhead. That’s what comes with the adviser-as-platform model, and it’s not talked about enough.”

Offering

Platform switching is a big decision for advisers to make – choosing the wrong provider could be disastrous.

Sometimes it may be better the devil you know, as IFAs often fail to see the complications associated with switching platform and may not appreciate what the platform provider actually does for them.

Parsons said: “We find that, as conversations develop and become more detailed, advisers recognise how technology can benefit their business efficiencies.”

Other areas in which they provide support are by providing investment management tools, assisting with client segmentation, using digital processes to lower risk, fulfilling regulatory requirements and changing adviser revenue streams, he added.

Concerned?

But overall, an adviser knows when it is the right time for a change.

However, if the Seccl survey is right and 69% of firms are ready to switch platforms – what does this mean for the platform industry?

AJ Bell’s Charlie Musson said: “The advised platform market in the UK continues to grow rapidly with advisers placing £86.3bn ($112bn, €104bn) of client assets on advised platforms last year.

“This growth reflects the importance platforms now play for advisers and their clients, not just as a place of safe custody for those assets but as a provider of tools and investment solutions that help advisers manage their client portfolios, as well as mobile apps that help advised clients feel more engaged with their investments.”

Parsons added: “We feel the platform market has a very positive outlook for a number of reasons. Jurisdictions in which advisers operate, where products are regulated and where third parties such as trustees and investment houses are based, are continuously going through regulatory change.

“The world is becoming more regulated. Covid and the acceleration towards digital solutions has benefitted platforms too.

“As we look to mature jurisdictions, such as the UK, it’s clear that the direction of travel may well mean a fee-based platform proposition will continue to be a significant part of an adviser’s product arsenal. However, there are fundamental, but significant, requirements to operate as an ‘international platform provider’.

“Systems/technology will be key to this, to handle mass adoption of platform, an adviser’s chosen platform will have to ensure it can successfully service multiple currencies for example. Providers will also need to be agile enough to adapt to multi-jurisdictional requirements and automated enough to ensure they are competitive.”

Setting up on their own

Another problem facing platforms is not only are firms looking to switch – but some are even contemplating adding their own in-house platform.

In August 2021, Seccl and the Lang Cat found 44% of advisers are considering investment platform ownership.

Praemium’s Sanderson said: “There are firms that have the operations capability, the deep pockets necessary to spend on customisation of the front end, and the risk appetite for doing more of what it is that platforms do. They should absolutely go down that path if it makes strategic sense. But they need to go in with their eyes wide open.”

Musson added: “Given the importance platforms play in an adviser’s business, it is only natural that they would consider whether they should run their own platform in-house. Some will be able to do that, but it is a big commitment of money, time and resource.

“As platforms have become more important within the industry, the regulatory capital requirements have grown, so not only will advisers have to invest significantly in the build and ongoing development of the platform, but they will have to hold enough capital on their balance sheet to satisfy the regulator.

“They will also have to invest time and resources in the admin that needs to sit around a platform to service their client needs and there will be no one else to point the finger at when the needs of their customers evolve and further development is needed, or where the occasional IT gremlin raises its head.

“The key question will be whether advisers are in a position to manage the many day-to-day tasks and associated costs that come with operating a platform while also looking after the interests of their clients.”

It was not the buyer that many in the industry had expected.

But Morningstar does not believe this should be the case and is ready to expand its offering to financial advisers – and saw Praemium as a great business to help do this.

Daniel Needham, president of Morningstar’s wealth management solutions business, told International Adviser: “Our strategy is to embed Morningstar’s unique insights and investors first solutions into the advice workflow and the investor journey. That’s the strategy for the wealth group.

“When we look at the UK market, we think the advice industry is and will continue to be an important industry.

“We feel like the number of clients, the number of assets and the elements of delivery are going to increase per adviser. When we look at that, we realise that technology is going to be really an important enabler to the advice workflow, and we think companies like Praemium International with their platform technology and CRM technology are really going to be critical parts of that.

“We think it’s a really good business as well, we think they’ve done a great job establishing themselves in the UK, and in the offshore markets. We think they’ve got high quality technology, but also great service, they really focus on their advisers.

“We do enter the platform space in the UK, but we have a platform in the US called a turnkey asset management platform (Tamp). We’re familiar with platforms.”

Competitive UK platform sector

Praemium International is a big name in the offshore market – but was growing well in the UK before its sale to Morningstar.

The UK advice industry does have a lot of platforms in the market – does Morningstar think it is too competitive?

“Our thesis is that the DFM market is a growing market,” Needham said. “We think discretionary portfolios are going to become more and more important and we view that segment as a growing segment in the marketplace.

“Generally, we think the platform market’s going to continue to grow, as the number of assets that advisers advise on grows, and we think the demand for advice is not going to be declining, we think it’s going to be continuing to grow. There’s a number of positive trends at play that mean it is not a zero-sum game, where you just compete for market share.

“We view it as an attractive market to participate in and we view Praemium’s offerings in the UK market as very compelling and very competitive. We’ll be continuing to invest in the business and allowing them to have a really good runway in the UK market.”

International platform market

Needham said that the UK is “the core focus” for Morningstar but the offshore space is “a really attractive market” for the business.

He added: “It’s not as big a market, but we think Praemium has a really compelling proposition for advisers that are operating in those offshore markets and we will continue to support that.

“We’ll do more work on those markets and see if there’s more we can do there, and potentially other markets. I think having capital to invest and support their strategy is going to be really important.

“We’ll see what’s out there, but we based off our analysis of it, it seems like a really attractive market and there are clients out there that need advice, and they need cost effective solutions. We think that Praemium has those available. I think there’s a number of potential opportunities for us. Anywhere where there’s an independent or a fee-based advice community, we think there’s an opportunity for us to help them.

“We’ve got a footprint in South Africa and a small footprint in India, where we’ve made some early investments. They’re probably top of the list to continue to focus on. But the solution we deliver in each of those markets is going to be dependent on the opportunity where we think we can do something different and add value for advisers.

“We’re not there to just launch the solutions and compete with already established players that are doing a good job and delivering services at value for money prices.”

Global wealth operation

Just after the Praemium International deal was announced, Morningstar created a business unit focused on the wealth management market.

The wealth management solutions group unites several Morningstar’s businesses, including managed portfolios from Morningstar’s investment management group, portfolio management software Morningstar Office, investment data aggregator ByAllAccounts, and the individual investor offering.

Once the deal is complete, Praemium International will fit into the business unit.

Needham explained the reasoning behind the global wealth operation.

“We’ve had a lot of offerings that are focused on the adviser market around the world,” he said. “The more that we can bring pieces together within one group, the more that we can start to meet advisers globally. When you’re in different regions, and you’re in different business units or product areas, you don’t get cross collaboration and innovation.

“There’s a benefit of having the different pieces together and having the leadership team overseeing the wealth propositions in the different markets. I think you’re able to identify common themes, spot patterns and develop strategy in that way.

“Also, scale is important. When you think about how you invest in the market, having more scale is going to be really key for us as we look at that. Bringing them together just made sense. In the US, that’s a big market for us and we think there’s an opportunity to deliver a more comprehensive suite of wealth management solutions.

“It’s exciting to be looking at businesses like Praemium International, and what they can bring to the group and what we can bring to their clients. The UK is early days for us, we’ve got more work to do.”

Future

Needham was asked about his five-year plan for Morningstar, and he said that he wants to “serve many more advisers and ultimately empower many more investors”.

“Advisers vote with their feet,” he said. “If you’ve got a compelling proposition and you’re solving problems, then you’ll have more advisers and you’ll have more clients and you’ll be helping more investors. For me, that’s going to be the test. I don’t have a fixed view on exactly what the solution is going to be because I don’t know.

“We’ve got our solutions now. We think the platform, CRM, investment planning, insights and investment solutions will be key. Bringing all these together to be able to deliver for advisers is going to be key. I’d love to see us working with multiples more advisers in a decade from now than what we are today.”

The rise of the large acquirers and increase in the number of private equity-backed firms is changing the landscape of the sector across Britain

The cross-border advice industry has not received as much attention from PE firms – but this could be about to change.

Charles Lake, partner at NMG Consulting, told International Adviser: “We don’t expect to see much ‘post-RDR UK’ type consolidation in the cross-border international market, in which providers bought and merged advice firms.

“Instead, we expect to see a formalisation of the processes by which advice firms access capital. This will open the international advice market up to private equity funding, which can then be deployed into growth initiatives including consolidation, investment in digital processes and evolution of customer acquisition models.

“But critically, we expect these developments to be led by the advice firms themselves, rather than the providers.”

Future of cross-border market

Lake also said there will be continued growth of professionalism within the industry, which he expects will make international advice firms attractive targets for investment.

“We think we will see a continued shift towards advice charging disclosure, and ongoing fees or trail-based commissions”, he added, “although with some difference by market due to local regulation.

“Additionally, we’ll see greater digitisation of advice businesses, which takes the form of CRM solutions, advice tools and execution tools, and a formalisation of adviser training regimes and qualifications.

“This all points to an increase in adviser capability and productivity. Those advice firms that make the most of this opportunity will use this future advice model to reach more customers, with higher asset balances and more complex needs.”

Competition

The cross-border advice market is made up of several pieces including wealth firms, life insurers and platforms.

The international platform industry is set to change with the sale of Praemium International to Morningstar.

IA asked Lake whether this deal means there will be a lack of competition in the international platform market.

He said: “From an adviser’s perspective, I can understand the concern around the number of platform competitors. But at the same time, international platforms need to operate at sustainable margins, which means that most platforms need to grow their assets substantially.

“If we look at how the UK domestic market platform market has evolved, it is clear that price will become increasingly important within adviser selection of international platforms. It’s then a question of if there is scope for value based differentiating factors in the international market, or is it just going to be about price in five years’ time?

“There’s a good argument to make that the complexity of multi-jurisdictional activities and complex customer needs in the cross-border market mean that there is actually a greater basis for value-based differentiation for platforms. In particular, international providers will be able to use there technical capability, as well as legal and jurisdictional support to differentiate from competitors.

“The willingness of platforms to develop that capability to support advice businesses is even more critical in the cross-border market than we’ve seen in onshore markets.”

New entrants

Inorganic acquisitions are not always the way firms can grow – office openings are also a big part of the advice industry.

So, could we see new entrants into the cross-border advice market?

Lake added: “We think the cross-border market as a whole has strong growth prospects and has demonstrated its resilience to macro challenges. From that perspective, we think is an attractive market to be in.

“But there are clear challenges involved in building scale and managing operating costs in this market. In particular, for platforms looking to enter the cross-border market, there are several large, established life companies that have deep experience and technical capability.

“There would be a lot of existing relationships to dislodge for any new platform entrant to be successful.”

The Financial Conduct Authority and Jersey Financial Services Commission have both greenlit the sale of Praemium International.

“Praemium is working through the remaining steps to complete the transaction with final settlement expected late in the current quarter or early in the next quarter,” the Australia-headquartered company said. The deal is set to be worth £35m ($44.3m, €41.5m).

The news comes a week after the firm announced net inflows for the first quarter of A$725m – up 82% from the same period in 2021.

The Australia-based business was itself the subject of a takeover offer last year, with local wealth manager Netwealth making a A$785m bid to acquire all issued shares.

The offer was rejected as it did not “appropriate value” the platform. However, Praemium said it remained open to “an engagement at an appropriate valuation”.