Investment platforms embrace change

Whilst huge winds of change batter the investment and regulatory environment, a fundamental shift in the way consumers interact with technology is altering the nature of what an investment platform is. Chris Kennedy reports.

As in much of the rest of the financial services industry, a wave of regulatory change and long-term market volatility is creating headaches for platform providers.

Volume rebates, traditionally relied upon by practices as one method of funding their licensee fees, have been caught up in a Future of Financial Advice (FOFA) crackdown on conflicted remuneration, along with shelf space fees paid by fund managers to platform operators.

Despite a recent consultation paper from the regulator adding some degree of clarity, it is still unclear exactly what arrangements will qualify as being “grandfathered”.

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Ongoing market volatility and an ensuing flight to safety have increased the appeal of cash and cash-like products such as term deposits – not an investment necessarily requiring the services of a platform operator, although major players have adjusted their offerings to attempt to retain market share.

Plan For Life data shows outflows have nearly matched inflows over the past two years, and combined with market stagnation means total funds on platform has barely shifted in that period.

Among all that, improvements in technology are creating a radical shift in the way advisers view platforms and what they expect to be provided, as well as creating legacy headaches for those that don’t stay abreast of the trends.

It’s not all doom and gloom however – the latest data from Investment Trends shows planner satisfaction with platforms is at an all-time high, although planners are also steadily rationalising the number of providers they use.

To grandfather or not to grandfather?

With the Australian Securities and Investments Commission (ASIC) having indicated long ago that volume bonuses would be addressed under FOFA, the industry has been awaiting clarity on what would be deemed “conflicted remuneration” and to what extent existing arrangements would be grandfathered.

ASIC’s recent update, in the form of Consultation Paper 189 Future of Financial Advice: Conflicted remuneration, provided an insight into ASIC’s thoughts on the matter, but by its nature is much more of a consultation than anything resembling draft regulatory guidance.

What is clear is that ASIC will view any volume-related payments from a platform provider to a licensee or adviser, by default, as conflicted remuneration, and the onus will then be on the representative who receives the benefit or their licensee to prove the payment was not conflicted – ie, that it did not influence advice given to a client.

Volume-based shelf space fees paid by a fund manager to a platform operator will also be prohibited from 1 July 2013, unless it can be shown that the payment is “a reasonable fee for a service provided to the funds manager by the platform operator or another person”, or if it is a discount or rebate that could be reasonably attributed to scale efficiencies.

In other words, the platform operator would need to show it is helping the fund manager achieve comparable economies of scale.

The bans only apply to agreements entered into from FOFA’s effective start date of 1 July 2013, but it remains unclear to what extent alterations to pre-existing arrangements could trigger the new bans.

It does suggest existing agreements transferred between licensees will not trigger the bans, but a client being transferred into a new financial product will.

All the platform providers who spoke with Money Management indicated that, to the extent it was possible, they were prepared for FOFA changes.

Michael Clancy, executive general manager, investment platforms, MLC & NAB Wealth, says the broader than expected grandfathering provisions will likely make FOFA implementation less challenging from a platform perspective, while the best interests test will still require advisers to rethink the arrangements they have in place.

“Adviser business models will still change and evolve but perhaps at a slower pace than if grandfathering provisions had been stronger,” he says.

AMP’s director of platforms Steve Burgess says it’s very challenging to prepare in the face of so much uncertainty, but the group’s plans are well advanced for when it needs to make changes from a product perspective.

“Right now, knowing what we know, we’re very confident that we’ll be ready,” he says.

“Clearly we’ll be grandfathering what we can – that’s strongly in the interests of our customers who’ve signed up to arrangements and contracts and should be allowed to persist with those going forward.”

Matt Heine, executive director of independent operator netwealth, says netwealth has taken a “wait and see” approach to the development of the platform, but has recently launched a number of rebate-free products with wholesale pricing for advisers.

The chief executive of independent platform provider OneVue, Connie McKeage, says OneVue never accepted shelf space fees from fund managers, and most of the group’s major clients had been on fee-for-service for some time – but that other elements of FOFA are a major concern.

Opt-in and fee disclosure

“Opt-in implementation, and how it will work so the adviser is somehow protected in the process, continues to concern us and should concern everybody, particularly the adviser sector,” McKeage says.

“We’re working with key clients to make sure that is implemented.”

Heine says although there are still some big unknowns around opt-in and the fee disclosure requirements, and until those are set in legislation there is “little value” in putting resources into incorporating that functionality onto a platform.

Heine believes the best place for opt-in to be implemented is via an adviser’s planning software rather than through a platform, but is still investigating if there are areas netwealth can support an adviser in implementing it.

However Investment Trends senior analyst Recep Peker says that feedback from advisers indicate they are looking to their platforms for an opt-in solution.

Those results were a little surprising given that planning software is usually seen to be the main customer relationship management (CRM) tool, but advisers are saying they want a way to track it on platform.

“When it comes to client review time, [advisers] want the tools to be available where the process is efficient and streamlined; they want reports to be generated fairly quickly,” he says.

BT Financial Group’s head of platform products Kelly Power also says advisers are looking to platform providers (amongst others) to help them make the FOFA transition.

“Our [role] as a platform provider is to ensure we can offer [advisers] tools and services that enable them to implement FOFA changes to business.

"That includes building things like adviser fee disclosure statements on our desktop; it includes ensuring we support them with clients who want to opt out so they can efficiently make those changes on the website and the platform desktop; and help them transition to a fee-for-service regime with a flexible fee-for-service charging mechanism on the platforms,” Power says.

“The big risk with FOFA is creating major inefficiency in advisers’ offices and increasing the cost of advice. Platforms play a big role in making sure that doesn’t happen by allowing them to transition in an efficient way and offer advice in an affordable way to people across the wealth spectrum.”

Colonial First State’s general manager of product and investments, Peter Chun, is another who says adviser feedback indicates they want platform assistance with FOFA changes.

Both bank-aligned and independent users of FirstChoice and FirstWrap are looking for assistance generating fee disclosure statements which CFS is working through now, and advisers also want greater advice-fee flexibility due to FOFA’s commission ban so they can charge a combination of dollar-based advice fees and percentage-based fees, Chun says.

Rivers of gold

The rivers of gold flowing onto platforms haven’t quite become a trickle, but five years of market volatility and stagnation have served to both dent investment returns and drive many investors into off-platform cash and term deposit-style options.

Plan For Life data shows that total funds under administration on wraps, platforms and master trusts has barely moved in the past two years, with inflows barely exceeding outflows and poor returns virtually cancelling out any gains.

From a total of $420 billion at the end of March 2010, total funds have fluctuated between $400 billion and $433 billion to sit at $423 billion at the end of June this year.

Peker says there has also been a shift as to where advisers are putting new client money.

Prior to the 2008 market crash around two thirds was going into managed funds, before advisers started increasingly shifting into the direct equities space in search of a lower-cost solution.

There has since been a huge drive into cash and term deposits, even though it would seem to be harder for a platform to justify their fees in this space – although Peker says many providers are now offering those options fee-free.

New flows into managed funds are now down to around 40 per cent, while cash and term deposits have risen to around 30 per cent, up from 15 per cent just a few years ago – although advisers expect to focus more on the equities space outside of managed funds in the future, with platforms having improved their direct equities offerings, Peker says.

“So the level of flows going onto platforms eased off between 2009 and 2011, but that seems to have stabilised now as platforms build more functionality and have addressed some of the concerns in those spaces,” he says.

BT’s Power says the focus on cash-style products has created a new wave of product development opportunities in areas like capital-protected products, while CFS’s Chun says outcome-based investing is a secure cash-like investment that has been driven by adviser feedback.

Chun points to CFS’s bank-backed deposit that returns the RBA cash rate plus 1.25 per cent net of all fees.

A legacy cost

A massive shift towards online accessibility, an increasing desire from consumers for ready access to their personal data, a general improvement in available technology and strong demand from advisers for greater efficiencies (particularly in the face of a current squeeze on profit margins) are all placing pressure on platform providers to stay abreast of technological enhancements.

Some specific themes include data accessibility and transferability (different data formats and systems not “talking” to each other is a long-term source of headaches for advisers and other practitioners), mobile device technology, and new investment products and changing demands (such as the introduction of separately managed accounts and unitised managed accounts, and a much greater interest in direct equities investing).

“Many platforms exist on technology that’s getting closer towards the end of its life, and not in a modern format that you can take your business forward in in an online world,” says AMP’s Burgess.

“You’ve got to get online, everyone’s life is moving online. We’re making a large investment to moving to an online environment. Customers expect that rich, easy, functional intuitive experience as when they log into their bank, and that also brings other efficiencies. We can’t stay in the past.”

General manager of distribution at IOOF, Renato Mota, says IOOF is investing “a tremendous amount” in technology, both in its underlying infrastructure as well as complementary technology such as CRM and portfolio management.

“Platform providers will differentiate themselves on the usefulness of their technology; we’re no different and we see that as key to our business. Not investing in technology is a false economy and will lead to the demise of some of the players,” he says.

MLC in recent years has brought together Masterkey Customs and MLC Wrap, and in doing so moved to a common set of technology product features and processes.

It has also recently launched nabtrade online trading, which is an upgrade to its national online trading capability and is a new technology set built from the ground up, according to Clancy.

DST Global Solutions Bluedoor executive director Martin Spedding, whose firm is responsible for the technology underpinning AXA’s North and is now helping AMP migrate its legacy systems across to the new technology, says we have now reached a tipping point in the industry where legacy has more or less run its course and most major participants are looking for new technology.

“We have a lot of very old technology, which is being held together well by investment and care and attention, and a lot of systems that have been fantastic workhorses for the industry and have lasted long beyond their original perceived lifespan – and have reached the point where there’s only so much you can continue to do,” he says.

The industry has so far been reactive in dealing with these changing needs in a piecemeal way, but at some point people will have to bite the bullet, Spedding says.

“The pace of… legislative change, compliance, governance, reporting, industry changes, that’s not slowing down, and the level of competition and demand on enhancing offers is also not slowing down.”

So what do advisers think?

The good news coming from the Investment Trends Planner Technology Report is that adviser satisfaction with platforms overall is at an all-time high. The latest results, released in June, were the most positive in the nine-year history of the study.

“Platforms are continuing to address advisers’ needs. They’re really improving their systems, getting more efficient, getting more usable and identifying what’s important to advisers,” he says.

Managing director of the MyAdviser dealer group Philippa Sheehan agrees.

Sheehan says major platform providers are “tightening pricing, they’re making their reporting functionality a lot more consistent, the quality of data is fantastic and they’re making the functionality of super and investment platforms almost seamless”.

Major providers are “absolutely” staying abreast of technological changes, and the providers on the MyAdviser APL are upgrading functionality to take advantage of changes going forward, as well as handling their legacy issues, Sheehan says.

It’s no cause for complacency though – advisers are without doubt looking to consolidate the number of platforms they use.

Sheehan says the number of platforms used by MyAdviser has dropped from 11 to four since 2005 – and that will likely tighten further as the field continues to level.

And according to Peker, the average number of platforms used per adviser has dropped from 3.5 each in 2009 to 2.3 each in 1012.

“We have about 27 per cent of advisers say they stopped using one or more of their platforms in the last 12 months,” he says.

Table 1 highlights the increasing dominance of the two major players, BT and CFS, and Table 2 shows how market share has become more concentrated among the top players over the past five years.

Unsurprisingly, there is a very strong link between satisfaction and attrition, with the platforms viewed as the best value likely to be the ones retained. However, “best value” does not necessarily equate to cheapest, according to Peker.

He uses the example of the Asgard Infinity eWrap which increased its market share to 8 per cent by April this year, just six months after it was launched, and employs a “Foxtel-style” fee structure where the base product is cheap (hence suitable for low net wealth clients), then charges slightly more as functionality is added on. 

So what do advisers want?

Aside from a stress-free FOFA transition, advisers are also looking for efficiency and flexibility, including streamlining of processes and integration with other systems, according to the Investment Trends study of 1400 planners.

Almost half of advisers indicated they wanted more streamlined electronic transactions, and a similar number opted for pre-populating forms from planning software to avoid double-keying data.

Because advisers in general are writing more risk business they also want better integration between platforms and insurance products.

Forty per cent of planners overall indicated they’d like better integration of risk products into either their software or platform – up from just 31 per cent the previous year.

Chun says feedback, particularly from the non-aligned channels, is that advisers want more of the planning software-type functionality such as record of advice (RoA) generation, as well as more help with model portfolios.

Model portfolios can boost adviser productivity by grouping customers who can then be managed as one cohort; the functionality helps them reduce administration effort and risk because they know all their clients are managed in a particular way, he says.

“We’ve had feedback from planners who’d like us to add the final part of that process, which is generating the RoA and sending that out to the client.

"So not only is the platform helping the adviser switch all their clients from one fund manager to a new fund manager, but this next piece of also generating RoA closes off that final loop and enhances their productivity,” he says.

However Justin Delaney, head of insurance at Macquarie Bank, says the value of investing in CRM-type functionality is diminished by the fact that most advisers use multiple platforms, in which case they still need another CRM option for clients not on the main platform. 

However, he said platforms would evolve to provide greater client interaction and access to tools through the platform.

“There is an increasing trend for people to want to understand exactly what a platform provides and what it costs.” 

Advisers are also looking for improved reporting functionality, Delaney adds.

“We will see platforms evolve for advisers who choose to take clients down that path, with more clients having access to implemented advice solutions, greater level of transparency and reporting access, rather than the platform taking on the role of planning software.”

Sheehan agrees: “I don’t think [platforms] can provide our [CRM] solutions because they’ll never have 100 per cent of my business. If I have 100 clients, 98 are on one platform but the remaining two are with Australian Super – how will I manage those clients? I’d need manual processes in place,” she says.

“We want platform providers to provide platforms, and leave the FOFA solutions to the licensees to create, whether they do so in-house or use external solutions.”

GBST is a technology provider whose clients include major platform operators such as BT, Macquarie and Suncorp.

It recently unveiled a “FOFA-ready” offering addressing updated fee-switching, opt-in and reporting requirements, among others.

GBST executive manager of wealth management Nick Frolich says another feature that is front of mind now for both advisers and consumers is mobile device compatibility, which allows not just balance enquiries but interactive processes such as transactions.

“Post-FOFA you have to re-engineer your products to cater for mobility apps,” Frolich says.

Paragem managing director Ian Knox says platforms need to get better at making data accessible to advisers in the event that they switch licensees. 

“Portability and transparency of clients should be easy from dealer to dealer. We’ve assisted practices transition and a number of dealerships make it very hard to transfer data,” he says.

Often they blame technology – but that shouldn’t be an excuse, he adds.

“It is reprehensible that a dealer is unable to transfer data easily when an authorised representative moves. On the one hand they’re dealing with you as an aligned independent, but if you move, that data is difficult to get out of their systems.”

Consumer play?

OneVue’s McKeage says we will see an increasing focus on the direct-to-consumer model.

“It’s increasingly difficult to articulate your value proposition unless the advice model evolves to something more like a customer-centric specialist advice model,” she says.

McKeage tips a lack of consumer focus as part of the reason for sluggish flows, and also says the growth in the limited advice sector will help drive an increasing consumer focus.

MLC recently outlined an increasing direct-to-customer focus, with a nod to limited advice offerings such as phone-based advice, in an attempt to bridge the gap to those consumers who were currently unadvised and were not looking for a full advice offering. 

BT’s Power says BT Wrap and Asgard were based on an adviser model, and there were no plans to shift away from that, but predicted a greater focus on straight-through processing in the next few years in order to improve efficiency.

Paragem’s Knox says the platform industry is currently “at a marvellous crossroads of consumer-driven change, being offered to us by a series of challenged market conditions”.

Knox says the global financial crisis has alerted us to the need to encourage people to invest more, and has highlighted the importance of greater flexibility and the embrace of technology.

“I think we will have a consumer-led recovery [whereby] every single thing we do moving forward is seen through the eyes of, and for the benefit of, the consumer.

"Everyone will win – more people will take up advice, more people will use platforms, and we’ll have a better industry.”