Do platforms need a revolution?

Platforms have been around for 25 years, but there seems to be a feeling among some industry players that it’s time for a fundamental rethink about the sector, writes Lucinda Beaman.

Cast your mind back to 1987. Bob Hawke was Prime Minister. Mobile phones were virtually non-existent; in fact, on 23 February 1987, the first mobile phone call in Australia was made.

Kylie Minogue’s Locomotion was on high rotation, and at the movies you might have seen Good Morning Vietnam. The average house price in New South Wales was $72,000, and you could still smell cigarette smoke in aeroplanes.

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That’s the year platforms were first introduced in Australia, via Asgard (Sealcorp, as it was then), with the launch of the country’s first master trust.

Fast forward 25 years, and there’s a feeling among some financial advisers and industry players that it’s time for a fundamental rethink about platforms, the way they interact with investors, and the role they play in helping Australians build their wealth.

Tony Fenning, managing director of Shadforth Financial Group, said while platforms have “gradually developed” since the early 1990s, there hasn’t been real innovation since then.

“I think what we’re looking for here is a more revolutionary breakthrough,” he said.

Over that time, leading-edge systems have become legacy issues, and more recently, once profitable and protected revenue models have become regulatory mine fields.

Bryn Nicholson, chief operating officer of non-institutionally aligned dealer group Yellow Brick Road, described this as a “very challenging time in terms of how financial products are manufactured and distributed”.

“We think that some of the assumptions about how that’s being done are changing, and we think the market’s ready for some better ways of getting financial products into the hands of consumers,” Nicholson said.

In a white paper on wealth management technology, consulting group Tria Investment Partners said Australia’s wealth management industry is being “assailed by a range of structural and cyclical forces,” – namely, the internet, advances in platform and wealth management technology, improvements in financial planning software and the advent of a listed operating model for managed funds under the Australian Securities Exchange's (ASX’s) Aqua II project all threatening traditional business models.

While regulatory pressures are the most immediate focus, rapid advances in platform and wealth management technology and online investing are presenting challenges and opportunities in equal measure.

And while the investment required in maintaining and developing platforms rises – platforms spent $130 million on new developments last year alone – the pressure on platform margins is rising on every front.

Perpetual saw the writing on the wall, and in October last year the wealth manager outsourced the administration of its platform to Macquarie in what Macquarie’s head of life Justin Delaney said was Australia’s biggest outsourcing deal.

Announcing the decommissioning of its platform administration system, Chris Ryan – at the time Perpetual's managing director and chief executive – said that in “the context of possible regulatory changes and rapidly evolving client needs, the cost of maintaining [the platform’s] functionality at required levels would have been prohibitive”.

Instead, he said the company would redirect cost savings towards growth opportunities.

Geoff Lloyd, then Perpetual’s head of Private Wealth (now managing director and chief executive) said the outsourcing arrangement would allow Perpetual to focus on servicing clients, while Macquarie Bank focused on the technology needed to deliver those solutions – a strategy Lloyd said would ultimately lead to higher levels of funds under advice.

Other companies, such as BT, continue to forge ahead in the other direction. Kelly Power – BT Financial Group’s head of platform products – said BT had spent around $50 million on its BT Wrap and Asgard platforms in the past 12 months alone. That’s separate to John Shuttleworth's $150 million budget for his ‘next generation’ wrap project.

For BT, it’s a no-brainer. With $68.1 billion in wraps that it sells under its own brands or administers on behalf of others, BT holds 48 per cent of the market.

But despite the recent investment, it seems there’s still a way to go. Shadforth Financial Group has substantial client funds on BT Wrap, Fenning said, as well on its badged CFS wrap called Symetry, and on Asgard.

“It would be nice if they could have some [more] technology in direct shares and be more open, and we’re pushing them all the time to have more term deposit ranges and more cash options,” Fenning said.

Fenning also believes it’s time for Australia to follow global examples of platform design, such as his personal ideal – the Charles Schwab platform in the US – which gives clients more access to and control of their investments and straight through processing if they want it.

“If they want to go through the adviser they can do that, but they’re not bound to go through the manual process of ringing or faxing an adviser to get a transaction that could have been done online.”

Fenning said while some of his peers would be more fearful of such an open style, “we feel that with the wave of internet banking and the use of the internet and iPads, the world’s moved past ringing your financial adviser to place a transaction. I’m sure it’s inevitable, it’s just a question of how long,” he said.

“We’re pretty loud and clear on that with our suppliers, who – to their credit – are saying yes, but having real trouble turning around the existing business model. It’s going to take them some time, but I’m certain that they will produce something that’s good. It just might take some time – and we’re on their case.”

BT’s Power agreed the time had come to change the way platform desktops operated, adding platforms “need to start engaging with end members”.

“We will always be a business that supports financial advice, and being an intermediated business, I don’t see us actively promoting a direct wrap offer,” she said.

“But investors are becoming more engaged and becoming more aware of their investments, so you need to provide them more access in terms of better reporting in response to that trend.”

In the meantime, smaller players are catching up, according to Recep Peker, senior analyst at Investment Trends.

“New entrants, such as Hub24, Linear, OneVue and Powerwrap, have significantly improved their adviser facing functionality in recent times, and now achieve similar scores in our platform benchmarking reviews to more established platforms such as Colonial First State's FirstChoice, AXA North and MLC Fundamentals.”

Cost cutting

Big or small, established or new – every segment of the financial services value chain is now under pressure toreduce costs, radically increase their value, or face extinction.

A number of platforms, including Asgard, AMP and netwealth, have recently introduced pay-for-use approaches, in which they strip features from existing products to create a basic version, onto which financial advisers can add chosen features such as equities, paying separately for each as they go.

The core of Asgard’s Infinity product is the Advance multi-manager options, plus cash and term deposits, with additional features able to be tailored to the client’s needs. BT’s Kelly Power said Infinity had attracted close to $1 billion since its launch at the end of October.

“It’s been really well received, and a big part of that is that there are no fees on term deposits, so obviously it’s been very attractive for clients that want to park their funds in term deposits and cash options,” she said.

Matt Heine, managing director of netwealth, said the group is releasing Super Accelerator, the first product in its new low cost, full-featured Accelerator range.

Super Accelerator will also provide multiple options to tailor client portfolios and deliver cost savings, Heine said, with the core menu starting at 35bps and capping at $250,000. The ‘plus’ menu would also have a $1 million fee cap and would allow up to six accounts to be aggregated, Heine said.

Macquarie’s Delaney said the group had $1 billion in inflows into its Consolidator Series, in the six months after its May 2011 launch, with another “significant milestone” expected to be hit soon.

The Consolidator Series allows clients to consolidate managed funds and direct equities and pay fees based on the value of their account, irrespective of the number of holdings in the portfolio.

“To us, this is proof of the growing demand among advisers and clients for more flexible and transparent pricing options, which are FOFA [Future of Financial Advice] compliant,” Delaney said.

But there are other cost-saving strategies available too. For years, separately managed accounts (SMAs) have been available as a cheaper and more tax-effective alternative to managed funds platforms, but until now they have remained the domain of the smaller players, and haven’t been embraced by the industry.

Yellow Brick Road’s Nicholson said although the dealer group is currently keeping many of its clients largely in cash, where equities are concerned, they see the best value for money in accessing them through SMAs. That’s one of the reasons YBR is in the process of migrating all of its clients onto the OneVue platform, Nicholson said.

“Our view is that, for certain classes of clients, separately managed accounts rather than managed funds will deliver better returns in the long-term, because the cost structure is lower and it’s more tax effective.

“It will take a number of years, it’s not going to happen overnight, but we think that SMAs – and being able to offer products based on that – will provide us with a competitive advantage compared to financial planning firms that are simply providing a kind of retailing service for managed funds,” Nicholson said.

Rick Di Cristoforo, managing director of Matrix Planning Solutions, said his group had also been “progressing through more and more use of managed accounts since 2006”.

“There has been some desire to move towards more efficient equity exposure. We’re always on the lookout for best practice platforms,” Di Cristoforo said.

Matthew Esler – head of adviser service for Ibbotson Associates, which provides investment consulting and adviser services including platform analysis – said managed accounts “provide what some elements of FOFA failed to achieve – a low cost, transparent, effective financial services system”.

“Dealer group research divisions really need to be aware of managed account solutions as an immediate alternative to managed fund platforms,” Esler said.

“They’re cheaper, more tax-effective, provide clients with more flexibility in terms of accessing funds, equities and ETFs, and they enable transparent investment management and execution.”

Currently, Hub24, Linear, netwealth, OneVue, Praemium and Powerwrap are among the platforms that offer SMAs.

But the bank-owned platforms are also working hard to move into the space. MLC has introduced managed account model portfolios. While Macquarie doesn’t currently offer SMAs, they’re ‘on the radar’.

Shadforth’s Fenning said his group had recently developed versions of separately managed accounts with BT and Colonial, including a managed discretionary account with the latter.

“We have launched, but softly, while we’re making sure that it’s fine and works as we intend,” Fenning said.

“I wouldn’t say the system is yet fully robust, so we’ve been reluctant to put the scale on there that we’re capable of while we test it.”

However, Fenning is happy to wait until it works.

“It’s an important option; but that’s all it is.”

BT’s Power said SMAs are a “key part of our strategic plan”, with development falling under John Shuttleworth’s ‘next generation’ wrap project.

“At the moment we’ve really focused on model portfolios and templates across equities and managed funds – that was what we delivered last year and which is kind of the building blocks towards full SMA capability,” Power said.

“Full SMA capability will come down the track, probably within a two-year time frame.”

Darren Pettiona, chief executive of Hub24, believes that “eventually, for Australian equities, managed funds will become obsolete”.

“The future is the international SMAs coming in. We’re talking to a group now that has 250 international managers and 1,300 investment strategies – we’re going to bring in and test run their top 20 managers,” Pettiona said.

“You know what they charge? 35 basis points.”

Chris Stevens, general manager for Colonial First State Custom Solutions, said Colonial is also interested in pursuing international equities as an asset class when an efficient trading solution can be found.

Despite the benefits, Pettiona acknowledges the slow take-up of SMAs will continue for some time.

“A lot of it is legacy issues – you’ve got to see a client, look at the tax implications, reset them with a new ideology,” he said.

“It’s just going to be one of those things… the switch from retail funds to wholesale and the platforms took ages, but then – bang.

“These are the biggest changes we’ve seen in a quarter of a century. Long-term, it will work, these things just take time.”