15 Jan Where will the platform industry be in five years’ time? (2028)
Making predictions is difficult at the best of times, but after two difficult years characterised by volatility and a dearth of flows, it’s positively hazardous. Five years ago, we predicted that a realistic scenario for 2023 would be industry assets of £880bn, which is pretty close to where we are today. Last year, our realistic scenario for 2023 was £938bn, and again we think that number is still achievable in the final quarter of 2023.
We base our forecasts on actual 5- and 10-year compound annual growth rates (CAGR), which are 9% and 12% respectively. Readers may be surprised to note that the realistic and optimistic rates are the same as last year’s with pessimistic dropping by one to 7%, but still comparatively high given the bruising period we have experienced.
The UK’s annual inflation rate fell sharply to 4.6% in October on the back of cheaper gas and electricity, its lowest level for two years, the steepest single month decline in the consumer prices index (CPI) since 1992. While prices won’t go down, the falls in inflation make it more likely that the Bank of England will slowly lower interest rates in 2024 as it seeks an inflation target of 2%.
The economy has been through a period of painful adjustment with businesses and households adjusting to a new economic environment where inflation and higher interest rates are the norm. But we believe the worst may well be behind us. Salaries and wages have risen to adapt and the economy is now on a more stable footing.
Goldman Sachs believes that markets fared better than expected in 2023 and that 2024 will see the world ‘escape the post-GFC environment of low inflation, zero policy rates and negative real yields’ and return to pre-2008 levels. The downside is that troubled balance sheets may come to the surface in 2024 as tighter financial conditions bite. The upside is that Goldman Sachs expects returns in rates, credit, equities and commodities to surpass cash in 2024. This will be a boon for the retail wealth management industry.
Yoyoing consumer sentiment
As with any painful adjustment (and this has been a particularly long one), consumer sentiment will lag any market improvements by several months. Much will depend on how quickly interest rates start to come down, and whether we avoid a recession in 2024. Consumption is likely to be subdued and businesses will struggle with rising costs and falling revenues. As a result, the 2024 job market is likely to soften, which will also drag on consumer sentiment and keep consumers in cash.
A general election is on the cards for 2024 and could be a game-changer… if it happens early enough. The US presidential election also has the potential to be a powder keg in late 2024/early 2025.
It’s not going to be pretty, but historical analysis shows that even during difficult periods, industry assets continue to grow at a modest rate. The platform industry was home to a compound annual growth rate (CAGR) of 12.2% over the last 10 years, and 9% for the last five.
With a forward growth rate of just 7%, the pessimistic scenario puts assets on course for £1.3trn by 2028. Much the same as last year. In this scenario, economic growth will be slow and sluggish. Higher inflation, greater tax burdens and the Russian-Ukraine and Israeli-Hamas wars will weigh heavily on sentiment and the economy.
The outlook for platforms could be eased by the steady trickle of pension business and the growing acceptance of the need to invest for the long run, regardless of the economic outlook. However, higher interest rates and ongoing economic uncertainty could keep investors away. Interest rate rises would continue to put pressure on disposable household incomes and depress overall savings levels. Platform activity will be subdued.
The realistic scenario assumes a forward growth rate of just 11% taking assets to c£1.6trn by 2028. This is a comparatively low growth rate that reflects the challenges facing the global economy over the next five years. It assumes that after a difficult 2024-2025 period, economic growth will revive and return to pre-GFC growth levels. This will also be fuelled by off-platform assets moving onto platform. Nucleus’s Curtis Banks acquisition is a case in point.
In the optimistic scenario, assets will grow at around 16% to reach just short of £2.0trn by 2028. When set against the actual 10-year CAGR, this optimistic scenario is conservative and predicated on the resetting of the global economy and the implications of geopolitical uncertainty. This growth rate is driven by an expectation the landing will be soft in 2024 with a robust uptick in growth in the four years after. That could be from a stronger-than-expected economy, positive sentiment from a general election in 2024 and a change in government, and increased benefits from a digital long-term savings sector, accelerated off-platform to platform moves, and intergenerational wealth transfer.
Channel projections are even more hazardous than industry ones. We expect retail advised business to grow steadily over the next five years predicated on the ongoing demand for advice especially in the pre- and post-retirement phases.
Overall, we expect the retail advised channel to slightly increase its strong market share of the channel split and reach circa £1bn on a realistic growth trajectory, leaving institutional/corporate channel and D2C to continue growth and reach £253bn and £332bn respectively.
The comparative success of auto-enrolment will ensure that workplace pensions will continue to grow at a steady pace, but it is worth noting that the channel remains under-represented in Fundscape data and therefore the upside potential is significantly higher.
Numbers shown here for the D2C channel include only the ones reported for this report. The D2C channel had a tough year with consumers raiding their ISAs to supplement their living costs, pay down their mortgages, or simply switch to cash in an uncertain economic environment. We expect 2024 will be just as tough for the channel, but the outlook should start to improve once interest rates start to subside again. Let’s hope Goldman Sachs’s punchy forecasts for the global economy hit the mark.
Photo by JorgeMoyol on Canva