Wraps, Platforms and Nucleus` Place within them by Paul

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Wraps, Platforms and Nucleus’
Place within them
Paul Bradshaw
Chairman Nucleus, Director Sanlam UK
Why now?
●
Open Architecture is old in the UK
i.
●
But the UK is way behind the rest of the world on wrap:
i.
ii.
iii.
iv.
v.
●
Skandia launched in 1984 following the offshore lead of Lloyds Life and others
Historic dominance of life companies in general and with profits in particular
Highly complex and continuously changing retail tax environment creates big
barriers to entry
Very profitable mutual fund pricing cartel
Extremely fragmented distribution model
Strong historic silo model (stock-broking, IFA, private banking)
Now because:
i.
ii.
iii.
With Profits was severely undermined in 2003 by new capital, reserving and
transparency requirements
Technology reached a tipping point
But fundamentally Regulator’s ‘broken market’ hypothesis leads to proposition
transparency and distribution reinvention
Who are the players?
●
Wraps are now extremely fashionable so everyone has to have one
●
We divide into transparent and opaque:
i.
Opaque is where a mutual fund kickback is not transparent
(Skandia, Cofunds, Hargreaves Lansdown, Funds Network,
Standard life)
ii. Transparent is where fees and kickbacks are transparent
(Transact, Nucleus and most modern versions)
●
Big commercial debate about regulation going forward, but we think
trend is clear and most opaque providers are embarked on large scale
rewrites for transparency
●
Significant (and often understated) mutual fund impact. Approximately
30% of Nucleus customer assets are low cost trackers
The opaque legacy platforms still dominate
(30/6/10 - source Platforum)
Platform
Assets(£bn)
Skandia
35
Cofunds
24.8
Funds Network
18.8
Hargreaves Lansdown
17.5
Transact
8.5 (31/3/10)
Standard Life
4.9
•
Nucleus at 30/6/10 £1.57bn
What do observers say?
● In 2006 Datamonitor estimated total UK
wrappeable assets in 2005 as £2.5tr
● Ernst and Young forecast £275bn by
31/12/12 (2010 Life and pensions outlook)
● Navigant Consulting forecast £300 bn by
2014-January 2010
Nucleus
●
●
●
●
●
●
Positioned as the IFA wrap with equity ownership at 51% subject to various
calls
Owned between 30% and 40+% (dependent on options) by Sanlam
Entrepreneurial and talented management - up to 17% equity
Supported by Bravura software and back office by Scottish Friendly
Assurance
Total capital employed to date £10M (including accumulated debt due to
Sanlam)
Tax wrappers supported:
i. General account
ii. ISA
iii. Sipp (open architecture individual pension)
iv. Onshore Bond (SFA)
v. Offshore Bond (Scottish Life International)
So what about Nucleus?
● IFAs have to buy a share in SPV to join (£15,000)
● Rigorous entry criteria
● Typical firm is large regional IFA (average 5-10
RIs)
● All entry firms have largely transformed their
businesses into post RDR compliant trail based
revenue
● Average client investment £130k
Nucleus-a short history
●
●
●
●
●
●
●
●
●
●
Launched 1/1/2007 with 7 supporting IFA firms
First EBITDA positive April 2010 - Board decided to pursue aggressive
growth strategy
Current assets (4/10/10) £1.813bn
Current supporting firms 69
Current cash inflows £75-£100M per month
Currently best platform on Platforum IFA research (August 2010)
Runner up on service quality and number 3 overall at Platform Awards
We now need to increase our capital and redeem the Sanlam debt and
this will be finalised shortly.
We are extraordinarily encouraged by the strong IFA customer
investment desire
We continue to view our core asset as the hearts and minds of our IFA
community
And what are the competitors doing?
●
UK Life companies are caught with nasty stresses:
i.
ii.
iii.
●
●
But fundamentally removing commission incentives removes all
competitive advantage in IFA market
Thus marketing attention is focused on direct to customer:
i.
ii.
●
●
Solvency II is complex and generally capital expensive
It is very difficult to live on wrap unbundled margins eg Standard Life’s half year
results show non commission expenses as about £614M for the half year. At
35bps gross margin that equates to retail assets of £350bn (cf total £108bn
disclosed)
And wrap doesn’t translate very well into EV reporting (even though the cash
flows are similar)
The legacy book
Corporate wrap/workplace marketing
Creating, we believe a vicious circle of IFA disillusion to our advantage
Mutual fund companies are challenged by transparency, the loss of trail
commission will focus real attention on added value
Conclusions
● UK retail FS market subject to unprecedented change
● Structural competitors severely challenged by:
i.
Solvency II, complex, high regulator scrutiny
ii. RDR-none of the leaders (other than Transact) are RDR
compliant. FundsNetwork, Cofunds and Skandia face
significant software and marketing reinvention challenge
iii. Reinventing margin in a transparent world for all
incumbents might imply halving cost base or worse
= Unprecedented opportunity
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