I set off on my recent trip to the UK smug in the belief that I’d be able to teach the Poms a thing or two, as our industry, as we keep telling each other, is so far ahead of theirs. As I traveled around, I realised it would be easy to act like an ‘ugly’ Australian, as the Poms are indeed behind us in many ways.
But interestingly, as I gained a better insight into their industry, and its structural flaws, it accentuated for me some of the reasons for the systemic flaws in our own industry. I describe these reasons, both in the UK and our industry, with one word — silos.
In the UK, there are approximately 25,000 so-called IFAs (independent financial advisers), of which only about 3,500 earn more than half of their income from investment related advice. There are less than 300 certified financial planners (CFP). The rest earn the majority, to all of their income, from life company related products. The industry is still very dominated by the life industry.
There are a number of distinct product lines, such as pensions, shares, listed investment companies, PEPs, ISAs (both tax wrappers) unit trusts and so forth. In the main, each are sold separately and not as components of an overall plan. What we call wraps or master trusts are emerging, but they are being built at the product line level, which they call supermarkets. For example, an operator called Cofunds promotes an ISA Choice Supermarket.
Interestingly enough, these supermarkets are at no additional cost to the adviser or public, as the operators take a slice of the underlying fund managers’ fees (as do the supermarkets in the US). Most fund managers have their equivalent of a management expense ratio (MER) of around 150 basis points (bp), of which 50bp is paid as a trailer. This means that the fund manager and supermarket provider share 100bp, with the fund manager normally retaining about 75bp. (So the ongoing MERs in the UK are cheaper, but the entry costs are still very high, as high as seven per cent for some products.)
The only equivalent to our retail discretionary administration services is a platform called Transact. Some Australians who developed the engine that runs Bridges TPS master trust run this. This is starting to be used by those IFAs in the UK who are delivering financial planning advice. And there are a number of IFAs who are delivering very sophisticated advice, focussing around estate planing, as there are still draconian death duties in the UK.
These better advisers are trying to escape the vertical or product line view of the world. However, the regulators in the UK are still product focussed and, together with the majority of the industry, are perpetuating the vertical or product line view of the world, the silo mentality.
Fortunately, in Australia, our regulator has accepted a holistic view of financial services, but unfortunately, a number of the industry players haven’t, they want to stay in their silo, want different rules for their silo, and believe theirs is the only silo. This is why many of them have fought and are still fighting the Financial Services Reform Bill (FSRB).
Before I go on, let me say that our regulators are more in tune with the ‘real world’ and how advice should be delivered than their UK counterparts. We might be over-regulated but the basic philosophy behind the regulation is sound. Our major outstanding problems are still investment property and debt products, but these are still a problem, not because of the regulator, but because of state rights and jurisdiction.
FSRB, as far as it goes, provides a level playing field. However, we still have the superannuation industry, lawyers, accountants and life agents (and even some financial planners) wanting some different rules. They are all arguing from the perspective of their own silo. Very few are saying: ‘What’s the best for the client’; ‘What’s the most efficient way we can conduct business?’
This silo mentality is impacting on the various efforts to automate transaction processing, with different parts (read silos) of the industry building separate and most likely incompatible solutions. Not only is it a disgrace that this industry is not fully automated, it is extremely disappointing, even contemptible, that we are not striving for an industry wide solution.
Each of us in our silos sees our part of the financial services industry as the most important (if not the only) part of the industry. I could pick on any silo, even financial planners, but I am going to pick on the superannuation industry, that is, the government, corporate, industry funds and corporate master fund players.
They have been used to a world where the fund, the trustees and the employer are more important than the member. They have collected contributions, invested them at their leisure and reported twice a year to members, normally three to four months after the reporting date. But their world is changing and they are trying to adapt within the mindset of their own silo. We now have investment choice, a tax on contributions, online reporting and allocated pensions.
They usually deduct 15 per cent from contributions and many use pooled superannuation trusts. Most have a benefit payment fee of about $30. A number are now setting up allocated pensions as stand-alone products. This means that they are extremely inefficient as far as tax is concerned for the member.
No fund would pay the full 15 per cent tax, but the full 15 per cent is deducted from the member’s contributions. If a member wants to transfer to the allocated pension, the investments have to be redeemed to cash and then transferred. When you ask why the above is so, the standard answer is: ‘What’s the problem?’ If you ask again, you’re told it has to be done that way because of the systems.
Unfortunately, the real answer is the silo mentality. These products do not have the transparency of retail discretionary superannuation master trusts, and they do not use a cash account to expose fees and investment timeliness. The member cannot manage their own tax situation or access a comprehensive range of online, up to date reports.
For some time now, the superannuation industry has been working on the SuperEC project, which is designed to automate transactions. This is laudable, but the solution is being done within the existing mindset, and being developed independently of the rest of the financial services industry and being heavily influenced by the existing superannuation systems providers. This is not helpful.
Unless you think the superannuation industry is alone with a silo mentality, we now have various parties trying to automate managed fund transaction, without any real consideration of superannuation. No one is looking for a solution that encompasses superannuation, managed fund products and shares. Each is too happy in their respective silo.
Even advisers are building a silo mentality around their wraps and master trusts, seeing them as central to the value of their business. They can’t see that the current platforms are just transitory vehicles that will evolve into being just a part of the mechanics of the industry with no value.
The winners in our industry are those that can properly identify where the enduring value is. For advisers, this is advice giving. For fund managers, this is investment management. For either it is not processing transactions, client database management and administration. These will be the domain of specialists, who have the systems, skills and scale to do it efficiently.
Don’t be a siloest, be a specialist!
