Businesses must update for future survival

Historydoes not repeat itself. Business cycles, market trends and business opportunities, if missed 10 years ago, do not represent themselves for a second bite of the cherry.

The master fund phenomenon of the late 1980s and early 1990s was a watershed for the industry. It changed the way the industry functioned by invoking a major power shift from the fund managers that held the retail client base to the portfolio administrators.

Now the wheel is turning again — this time in favour of the service provider. Market consolidation will further hasten this shift and lead to even more rapid changes in the future.

This is bad news for industry participants locked firmly in the past. In other words, if you are still using the business models that worked a decade ago, you cannot hope to compete in today’s radically different environment.

We have seen the funds management industry rapidly consolidate in the last five years.

At the same time, the financial planning industry has changed considerably. This has primarily been driven by the financial institutions’ ever-growing appetites to build closer ties with organisations that might distribute their product for them.

The relatively low capital cost of entry and consumer demand for smaller specialised players ensures the continued emergence of boutiques.

In this ever-changing financial services industry, where does this leave wealth management services? Just as in the broader industry, consolidation will inevitably occur but without the side effect of the creation of boutique players. The capital outlay required to be competitive in wealth management is simply too large for small players without the necessary backing to succeed.

Does this mean we will see a reduction in the number of market players? Not necessarily. Instead, the market will likely experience exactly the opposite effect. Just as the focus of the industry shifts towards advice and planning — and away from product and administration — dealer groups, stockbrokers and accountants will become branded providers of wealth management solutions to their customers.

A further effect of industry consolidation and the high capital barriers to entry that will impact on the wealth management area will be a decrease in the amount of platforms that are used to build and provide wealth management services. Platforms that survive the ‘marketplace make over’ will be those that deliver the goods to the evolving ‘new look’ industry.

In essence, if you are a financial planner, stockbroker or accountant, your future is bright. Your dealer, institution or association will have the choice of market-leading wealth management platforms on which you can base your business asset. You will be able to offer your own, fully branded, wealth management product — and actually own the asset in its entirety.

Fundamental to this principal is the proposition that you should be able to treat your platform provider as a supplier to your business, rather than the supplier itself being your business, as has occurred in the past.

Suppliers are changeable. Suppliers have contracts to deliver a service that in any other industry rarely involves transferring the revenue-generating asset from the customer to the supplier.

For some reason, our industry is different and the result is that portfolio administration platforms are sold and valued based on the financial planners’ funds under advice, rather than on the revenue generated by their contracts.

Platforms that operate on this basis, those that innovate rather than replicate, and those that invest heavily and successfully in technology, have a better chance of success than the rest. The smaller master fund or wrap account operators will seek out these providers and outsource their platform development and operation to them. This saves them the massive cost of the required technology development in this competitive market, while allowing them to focus on their core competencies.

It is against this background that the number of platforms will consolidate while product operators proliferate.

But these operators will be running their products and services from fewer and more sophisticated platforms.

The way forward for wealth management services lies with the advice givers and their organisations. They will own the product, own the asset and they already own the client relationship. Wealth management providers that are unable to adapt their business to this paradigm will lose the battle, and those that are busy replicating current or past business models have already lost the war.

Mark Papandieck ischief executive officer ofAvanteos.