Platforms: When one size does not fit all

The ongoing debate around who platforms are actually providing value to continues. Is it the adviser who gains efficiency from the functionality, seemingly at the expense of the client who pays the cost of the platform? Or is it ultimately the platform which makes the profits? Or does the client receive equitable value from that cost that is paid? 

There is no doubt that platforms provide access to a wide range of investments in an efficient manner, minimising paperwork and providing portfolio and tax reporting and online access. They also provide tools for the adviser to efficiently administer the client’s portfolio. 

But most platforms are products. As a result, the fees are charged from the client’s cash balance by the product provider. So while the adviser recommends the platform to the client, the client is paying for the cost of the platform, and the platform provider controls those fees. 

THE VALUE DEBATE – WHO BENEFITS?

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A better alternative approach would be for a platform solution to be offered as a service with the service fee charged to the adviser who has the choice of whether to on charge this to the client. This would allow an adviser to partner with the platform solution to make their own business more efficient, while directly controlling the fees the client pays, while still meeting their compliance obligations and providing a transparent service to the client. 

The value debate is slightly blurred when one considers who is getting the benefits derived from the clients’ assets. In most cases in the market, platforms make money from the investor’s assets in addition to the administration fees charged to the investor. 

For example, a cash fee is applied by many of the platforms which often results in the client’s interest earned being less than the administration fee, that is, there is a net charge to hold cash on the platform. 

Another example of these additional or hidden fees are those associated with products offered to the clients where the platform earns management expenses. Some platforms offer their own managed accounts and whilst they have the right to charge a fee for that investment expertise, they sometimes also make additional revenue in negotiating rebates or lower expenses on managed funds in the model, that are not passed in full to the investor. 

In all these cases the client is paying the headline fees, while the platform is also benefiting from an additional revenue channel derived from the client’s portfolio of assets. It begs the question of who really is benefiting and at who’s expense? 

While not an additional fee, some platforms restrict the menu of assets available and in the cases of bank-aligned platforms, this is even more obvious for the likes of cash and the limited range of bank term deposits made available. 

Quite simply, most of the platforms in the market have conflicted revenue sources. A platform’s purpose should not be to own the adviser’s clients, nor make money from their client’s assets, or hide fees for no service. 

NAKED PRICING AND THE FEE FOR SERVICE PLATFORM

As the banks divest away from wealth, and with the flight of advisers from once bank aligned dealer groups to non-aligned, the basis of (vertical integrated) choice of platform has changed. While the ‘headline’ fees clients are paying have fallen, the additional fees – such as per account, management expense/ICR, cash fees and self managed account model fees - have not in the most part fallen. In some cases they have even increased. 

There is no doubt that the culling of grandfathered commissions, Standard 3 of the FASEA Code of Ethics, and the advent of new technology-led platform solutions for advisers, will enable a shift in the next generation of advisory practices towards naked pricing and fee for service platform solutions away from platform products.

The concept of naked pricing strips out fees exchanged between third parties in the value chain of advice and discloses only those fees payable to a client on a clean basis, void of revenue bias or conflict. 

The increasing prevalence of naked pricing will shift the margin from product – and commissions – to the adviser and will result in a lowering of the client’s overall fees. 

A key issue with the old pricing model is that it is not clear to a client who is taking what in the value chain. This results in conflicts of interest, and ultimately in the client paying too much for the service being offered.

Examples of fees that are exchanged between third parties in the value chain include grandfathered product trail commissions, volume-based bonuses, badged platforms, shelf platform administration/separately managed account (SMA) fees, cash platform fees, and platform in-house product costs. 

In a nutshell if we asked the question “why do people pay money for the product?” one could question if those who are typically paying - the investors - are well enough informed of the true cost they are paying?

INCREASED MANAGED ACCOUNT EFFICIENCY

One area where the technology of platforms is bringing increased value is with managed accounts. One reason managed accounts are beneficial is their tax effectiveness (franking etc) which comes from the ownership of the assets as compared to a pooled unitised structure. Managed accounts provide greater transparency than some of the pooled investment options. Managed accounts can also reduce the adviser practice administration and increase efficiency. 

There are also scale benefits with managed accounts as clients get reduced implementation drag and equality in price of the trades. This is even more so with those platforms where the portfolios can be traded into the market intraday and derive execution alpha in appropriately working with market makers for exchange traded funds and managing limit orders into the market. In volatile times, the ability to amend all the clients’ portfolios effectively and efficiently is key. But it is not a functionality all platforms provide, as was borne out in the recent volatility and market turmoil that occurred with the onset of COVID-19.

Platforms that were not able to provide bulk rebalancing of portfolios and ease of changes to all client’s portfolios intraday may not be as well regarded by advisers post this pandemic. If the technology of the platform provider did not assist the adviser in this ease of portfolio management in such volatile market times, it is the underlying clients who have suffered as a result of the implementation drag. 

The second part of the debate is whether platforms, while bringing some of these benefits, are able to meet all of a client’s needs?

The ‘battle’ between industry and retail superannuation funds (on platforms) is well-known and hard-fought. During the COVID-19 pandemic, with the focus on superannuation and the pros and cons of early release, there have also been many articles about the lack of transparency of the investments in industry super funds.

COMPARE THE PAIR

Advisers must compare the recommended product to other products including industry super funds. Some of the benefits of a transparent superannuation option include allowing the member to have full transparency on the underlying assets held in the member’s name. This is compared to the relatively opaque investment options or asset class investments that are commonly offered by industry - and some retail - products. 

Another benefit of a retail super offering is that the member receives their own franking credits. This is compared to pooled structures where the member gets an allocation based upon the investment option being a unitised or pooled trust structure. Member direct options in industry super funds do offer the ability to own direct Australian Securities Exchange (ASX) assets, but many limit the range and do not allow managed funds to be self-directed. 

While the debate around platforms and independence continues to rage, one thing remains clear. For advisers who are looking to earn client trust and help Australians in a time of economic challenge, they are hamstrung by many of the product platforms they use and recommend that continue to act in a manner of bygone and conflicted times.  

Shannon Bernasconi is managing director of WealthO2.