navigating offshore waters

Some succeeded, many did not. Much red ink flowed.

On a smaller scale, a similar race is now under way in the offshore – or “international” as some prefer to call it – investment platform space, as more than a dozen companies vie to become the Amazon, or Facebook, of the industry.

As with that original dot-com land-grab, the one involving offshore platform providers is characterised by a range of business models.

Some of these business models do not fit well with others already on the market, and this is the source of much tinkering and retro-fitting.

Platforms vrs life company structures

In particular, the traditional offshore bond structures of life companies are said not to marry well with the new offshore wrap platforms, unless they have been configured to work with the platform provider in a way that enables costs to the client to be kept to a minimum.

This is because they were originally designed to be free-standing, self-contained entities, and have charging structures that reflect this, those on both sides of the debate agree.

The platform vrs life company tussle is more advanced in the UK onshore market, where the pending implementation in January of new rules covering transparency for financial products and services under the Retail Distribution Review (RDR)  is, advisers and platform experts say, obliging advisers to scrutinise the advantages of offshore bonds compared with those of direct investments on platforms.

Explains Michael Fordham, managing director of Platform One, which operates in both the domestic UK and international platform markets: “Any new regulation anywhere which is RDR-ish is going to force people to use platforms, because if an IFA can’t get commission anymore, and has to work within a clear and transparent charging structure, platforms ensure that he continues to receive a revenue.”

Lower investment returns

The wrap platform vrs life company platform debate is also being forced by the fact that investment returns are much lower than they were in the recent, pre-financial crisis past, many industry commentators point out.

This makes it increasingly difficult to justify to a client, particularly in a transparent charging environment, the stack of payments going to fund managers, product providers, advisers and the platform provider.

Though charging structures vary, a typical arrangement might see a fund manager taking an annual fee of 1.5% of the client’s asset value, of which he would keep around 0.75%, with the remainder being rebated to the wrap platform and IFA.  Additional fees would then go to the life company providing the wrapper.

Explains one offshore platform company executive: “Those tax advantages [of offshore bonds] are more than offset by the excess costs that come into play with such bonds when they are held on a platform.” 

Life company executives choose to differ, of course, perhaps few more than David Kneeshaw, chief executive of Royal London 360°, which has been one of the life companies that has been most aggressively going after the platform market.

Indeed, Kneeshaw says, the company has decided to re-jig its UK sales operations to throw all its weight behind “good quality" platforms operating in the market, and de-emphasising the traditional, direct-to-adviser sales route.

This shift, he notes, is a reflection of the company’s belief that in the UK, going forward, “the focus, post RDR, will be on platforms”.

‘40% of new business’

Already, as much as 40% of the company’s new offshore bond business in the UK is coming through the platforms RL360° has established relationships with, Kneeshaw says; “offshore it is still very much smaller, probably less than 10%, but we anticipate it will grow”.

RL360° addresses the charging issue by offering a different charging structure to those clients who come to its bonds through platforms, which it is able to do “because we’re doing less work” for those accounts, Kneeshaw explains.

He does not see this model replacing the traditional offshore bond platform, but rather, existing alongside it as an alternative option for IFAs. 

“Our strategy for the last four or five years now has been to link to the UK platforms, with the result that we are now linked to many of them, including  True Potential, Fusion Wealth, Nucleus, Novia, James Hay, Sanlam and Ascentric,” he says. (RL360°’s parent company, Royal London, is Ascentric’s major shareholder).

In the offshore space, RL360° is on such platforms as Acordias and Boston Direct.

“I don’t understand anyone who says the market is moving, or has moved, to platforms from offshore bonds, because there are advantages associated with offshore bonds that putting your money onto a UK platform does not give you.”

As for the offshore space, the RDR-type regulation that has created the climate of transparency in the UK that has called attention to bond and platform pricing structures is, Kneeshaw adds, “a long way off”.

Meanwhile, he notes that even in the overseas markets, offshore bonds continue to offer compelling tax advantages for expatriates who plan to return to Britain.

“Either way they [IFAs and their clients]  come to us – directly or through a platform – we’re relaxed. We think the choice should be the adviser’s.”

Andrew Wilkins, chief executive of Acordias, a new entrant to the offshore platform market in May 2010, says he has noticed the life companies are increasingly trying to do more with their platforms – but not as competitors. “Rather, they are actually working with us.”

“The difference in attitude from the life companies now vrs 18 months is dramatic,” he adds.

“When we first approached them, they said, ‘Why would we do that? You’re our competition.’ There has been a complete, 180-degree turn, which is great.”

‘Not either/or’

John Martin, chief executive of Praemium UK, the UK and international platform arm of Australia’s publicly-traded platform giant Praemium Group, takes the view that “there is not an either/or choice” when it comes to choosing between a platform and a tax wrapper.

“A portfolio bond with a model of funds can be ideal for an expat in Spain, and a naked account of direct equities and fixed interest securities may be right for a US citizen,” Martin explains.

“The adviser selects the right path to suit the circumstances of their client, which may be a ‘naked’ unwrapped investment directly onto the platform, or it may be an investment via a wrapper, [choosing from such options as] bonds, QROPS, QNU{S, family trusts, offshore pensions and so on.

“Our role as a platform provider is to provide the asset administration, regardless of the wrapper, that best allows advisers to run investment strategies efficiently or to help with in-source investment expertise from an external asset manager.”

Praemium currently works with such life companies as Friends Provident International, Axa Life Europe, Axa Isle of Man, Aegon, Skandia International, Royal Skandia, Canada Life and IOMA, and more are due to come on board soon, according to Martin.

Global trend

Similar discussions on the way life company products and platforms should fit with wrap platforms are taking place in Asia, according to officials at one of the region’s largest investment platform providers, 12-year-old, Singapore-based iFAST, which now also has operations in Hong Kong, Malaysia and India.

IFAST’s chief executive, Lim Chung Chun, foresees an “acceleration of the growth” of the platform market, “especially vis-à-vis offshore portfolio bonds and life platforms, when transparency of commissions for advisers improves, or when there is a move towards fee-based advisory models.

“On a global basis, we are indeed seeing that trend developing,” he adds.

Third-party administrators

Few in the platform industry have as good a view of its workings as John Pauly, the founder and chief executive of Luxembourg-based Moventum. This is because his company, which he founded in 2003, provides the platform technology and infrastructure used by some of the best-known financial services platforms, while also running its own no-frills platform business for financial advisers.

For Pauly, one of the biggest trends is the growing use by IFAs of third party asset managers, who are increasingly being given the task of looking after clients’ assets.

“This is mainly happening in the UK, where the role of the adviser is being redefined by the [new] regulations,” he explains.

For platform providers, this typically means being able to offer advisers model portfolios, which, he notes, by a happy coincidence, fit naturally into the technological structure of platforms.

RDR has not been unmitigated good news for platforms operating in the UK as well as overseas, however, he notes; for one thing, the costs of preparing for it have been eating into most companies’ profits, and few platform providers are wildly profitable, given that the industry is young, expensive to enter, and competitive.

What is more, proposed Financial Services Authority regulations that would oblige platform providers, working through their adviser clients, to provide investors with what Pauly says would be “every scrap of news about every fund they hold”, as part of its insistence upon transparency.

“It is more than just a hassle, there are very substantial costs associated with [this plan], and the FSA is saying that the investor should not be the one to bear the cost,” Pauly says.

“Personally I am a big fan of transparency, and of investor protection, but where it is necessary and where the risks lie. There are areas of risk out there, but I do not believe this is one of them.”
 
Key offshore/international platforms