The future for the investment platform market

It may have taken 10 years, but predictions that the platform market would shrink to a handful of providers have finally come true. Yet Jason Spits discovers that it's not all doom and gloom for the big players holding the cards - or the small players who believe they have the smarts to start the next platform revolution.

One decade ago a US-based research firm arrived on Australian shores telling the wealth management industry that everything we knew about platforms was going to change.

You may remember the name: Cerulli Associates. Money Management used the headline “Master trust time bomb” to describe the report presented by the Americans.

Yet despite dire predictions (see page 16) gloom has not descended onto the retail funds management market or the platforms that were — and still are — a key part of retail financial services.

Wealth Insights managing director Vanessa McMahon says that instead of declining, platforms received a boost during the boom years of the early part of this decade. This has continued, making them popular targets for acquisition.

Recently, Wealth Insights released research that demonstrated the number of platform providers in the market had dropped from 15 to nine since 2006, thus fulfilling — albeit belatedly — one of the Cerulli predictions.

Moves by the banks to build or acquire fund management operations have also led the platform providers to be the top of the pile in a number of key areas. These include the percentage of advisers using their platforms as well as market share.

Despite this upward trend, one number that has not decreased is the amount of platforms in the market. Data provided by Dexx&r indicates that at present there are still nine wrap products operating under various labels and 29 master trusts as of December 2009.

Platform ownership has been going through market consolidation, but there has been no real change in the number of platforms currently on offer. This is consistent with an evolving and developing marketplace, according to Praemium Group chief executive officer Arthur Naoumidis.

“Consolidation presupposes no further evolution in the platform market, but people will continue to invest in new ways of doing things and some will win and some will lose those investments. It is not a case of ‘if’ but ‘when’, and innovation does not stop — especially in financial services,” he adds.

He claims about one-fifth of funds in the platform space are administered through non-aligned platforms, and that this is where future innovation will take place.

It is not that changes have not occurred, according to Naoumidis — it is more a case that many of the changes on larger platforms under an institutional owner are harder to implement and more costly. This is the result of legacy systems many platform owners have taken onboard as a result of acquisitions.

McMahon says the larger end of the market is in a very mature phase, and movement between platforms is less than 6 per cent each year. As a result of this, there is no room for a new player that would offer a platform product (as the market currently knows them) in the same way Credit Suisse attempted a few years ago.

Rather, if new ground is to be broken in the platform space it will be due to technological advances and price pressures, McMahon says.

“Any new offering would have to be based on amazing technology or offered at a very good price, and there must be people out there who are developing new products with both of these in mind.”

She continues: “Advisers are still fee conscious for themselves and their clients, and it has been argued that there is not much room to move on fees. Any reduction in overall costs either at the platform level or the [management expense ratio] level would result in huge savings for the advisers.”

Naoumidis also sees space for new entrants in the small, technology-driven arena. He says the emphasis will be on independence and low costs.

For example, Praemium currently provides its V-Wrap service to the new entrant, Powerwrap, which opened for business in the middle of 2009.

Powerwrap chief executive Andrew Varlamos does not envision his group remaining the only new entrant in the market. He says interest for non-aligned platform solutions will be the seeds of growth for the next generation of platforms.

“As a relatively new player we are seeing interest from a wide range of planners, including those aligned with larger licensees.

"There is recognition that a new entrant into the market provides opportunity, and while some may be concerned that new technology requires an investment, it is also cheaper, quicker to build and takes less time to get up and running,” Varlamos says.

He also challenges the position of the incumbents in the platform space, stating they can only be considered as such based on their current offerings to the market — which assumes that clients and financial planners are happy with what they are being offered.

“The global financial crisis pushed end clients to seek better and cheaper markets. The platform space is not static, despite its appearance.

"The growth of self-managed super funds (SMSFs) has demonstrated the interest in more control, value and transparency and this will create a better environment for new platform entrants than previously seen in 2008 and 2009,” Varlamos says.

It is in this area of investment control and engagement in regards to SMSFs that wrap accounts and even industry funds will face pressure in the future, according to Naoumidis.

He sees established platforms as breeding grounds for disaffected clients who will begin to look for greater control and transparency as their wealth grows. At the same time he believes that not only will we see new platforms, but also new types of platforms that focus on products such as separately managed accounts (SMAs).

“In Australia SMAs are sold at the product level, but in the UK they are sold at the strategy level. We may see something of that nature where an SMA or SMAs holding directs equities, exchange traded funds (ETFs) and managed funds is on offer,” Naoumidis says.

While the bank-owned platform space may be saturated, people will still want different services. But financial planners will need compelling reasons to shift from current platform models, says Naoumidis.

“These reasons will need to be more than just a price difference but also a range of investment options that are future proof and demonstrate the long-term capability of the platform to both the advisers and the client.

"Financial planners need a sustainable revenue stream and will consider any platform in regards to its long-term return,” he says.

McMahon says despite interest in SMAs and individually managed accounts (IMAs) they have yet to take off with advisers — even among those advisers who are looking for more control over client portfolios or a cheaper route to market. However that is not necessarily the fault of the advisers, who can be busy dealing with clients.

“Take for instance the use of ETFs instead of index funds. ETFs can be cheaper but do the same thing as index funds, but retail funds managers are not telling licensees or platforms about ETFs or index funds. Their focus has remained on retail funds offered through a traditional platform offering,” McMahon says.

However Vanguard head of retail, Robin Bowerman, says the battle for the desktop has not taken place under the cover of consolidation (which has not affected the group’s access to planners), but rather with regard to the value proposition of the underlying manager.

“This is the issue for new managers entering the market. Can they get traction and exposure in a more concentrated platform market where platform presence is a substitution game?”

Bowerman says it is understandable that platforms have consolidated under fewer owners to gain scale as they experience margin pressure across the market. The move to fees will lower costs, he says, and price pressure will be applied across the whole distribution chain.

“As a relative low-cost manager we have been pushing the message that advisers are looking at lowering costs, and this will have a long-term structural shift. Advisers are moving to a fee-for-service model because they want transparency, and platforms must be able to support that,” Bowerman says.

“Platforms need to recognise they no longer act in isolation, and they will be influenced by financial planners and their views of what is on offer and how much it costs.”

The Independent Financial Advisers Association of Australia (IFAAA) managing director, Daniel Brammall, also sees the interaction between platforms and advisers as setting the tone for the future.

“Owners of platforms do exert control and it can range from the indirect to the direct and from the subtle to the obvious.

"In some cases they have already done so by claiming to have simplified the business of the financial planner but instead have built a dependence on the platform through compliance, back office and reporting tools,” Brammall says.

However, in his experience, he has not seen a consolidation of platform offerings but rather a push for diversity among platform owners — which in turn has caused some concerns.

“The consolidation of owners has left a good range of platforms in the market but the agenda of institutional owners to work products down to the grassroots has not been a positive outcome for the industry.

"Neither is the development of the platform paying advisers who use a fund that comes from within the same group. In this regard consolidation has heightened potential conflicts of interest,” Brammall says.

“This reliance on platform providers can cause a predisposition to use them, and when platform providers make financial planners addicts to their products this can lead to problems with the advice.”

But Brammall also believes that platforms can lead the way in how planners charge for their advice by forcing advisers to abandon traditional fees and commissions and charging flat dollar or hourly rate amounts.

“By shifting from a funds under management approach to fee-for-service model platforms, working with licensees could provide simplicity for both planners and clients. It is an education issue as much as a financial issue and at present the standards are not high enough to make advisers appear professional.”

Brammall’s concerns are likely to continue to be the subject of debate, particularly given the state of flux the post-GFC markets find themselves in at present.

Money Management outlined some weeks ago how further changes in the platform space may pan out but IOOF has already signalled that it will pare down the number of platforms that it owns.

IOOF managing director Chris Kelaher stated at the group’s interim results announcement in February that it would move from the eight platforms it operates at present down to three by the end of 2011.

These three platforms were not disclosed, and neither was a definite timetable. IOOF stated those platforms that would remain and how the others would be integrated was dependent on adviser and client feedback.

But IOOF should have some experience of this, having recently completed the rationalisation and integration of Skandia clients and funds, worth about $4 billion, into its existing product mix.

Yet rationalisation and consolidation doesn’t come easily, with IOOF telling Money Management that 125 investors meetings were needed to complete the Skandia integration project.

It may be this potential workload that is putting off some of the larger platform owners from taking the knife to their roster of investment platforms.