Where does all the money go?
Investment platforms sit in the market and present an unusual quandary for many in financial services, with some of the biggest platforms finding it hard to make decent profits after the administration and technology costs are removed.
However, planners keep pouring client funds into them because of the ease of use and one stop administration and reporting they offer. Oddly enough, many dealer groups will admit, maybe reluctantly, that they are not the money maker but rather the platform is where the most value is added.
Add to this the cries of fund managers who claim they are providing wholesale access to funds at bargain prices and it seems the whole value chain from planner to underlying manager is not a rich one, which is why each part of the chain defends vigorously the charges they levy.
But someone has to be making a profit in each step of this chain or it would have fallen apart or been replaced with something better.
On the platform side, one of the best ways to generate revenue is from administration, and the other is the funds and investment management.
These two are closely related and are often linked depending on how much of its funds under management a platform passes on to external managers and how much is retained by the platforms own allied funds management business.
The graph below shows the leading 10 groups by the amount of funds each of the platform providers market and actively promote (that is, funds under management) and how much each platform administers (funds under administration) at the end of December 2002 — the most up-to-date data available.
Equal bars mean that the platform markets and administers the same money, which implies a relationship between those two parts of the business which is internal linked.
However, the uneven bars forMacquarie,BTandSt Georgeindicate they administer more money than they market due to the presence of badged master trusts and wrap products throughAsgard, BT’s White Label Service and the Macquarie Investment Manager Wrap.
What is unique is the position ofAMP, which is the only group to market more funds than it administers, which is due to the group promoting its badged Asgard vehicles and outsourcing the administration to the supplier.
But the rabbit hole goes deeper as data compiled by Plan for Life andBrillient!show that a number of platform providers (see table 1) do an excellent job of keeping funds ‘inhouse’, while others have taken large stances when it comes to outsourcing the investment management in their platform.
It is worth remembering that these are first points of contact for funds administration, so many groups that have a 100 per cent retention figure will be likely to pass on or outsource some of its investment functions to third parties.
This is certainly the case for groups like MLC Investments, BT Funds Management andZurich Australiato name a few who have multi-manager or single manager outsourced investment arrangements.
But is this passing on of your clients’ funds to a platform — who in turn may pass it to an underlying fund manager, who then chooses to outsource the investment component — creating problems or even diverting the investment intentions of clients?
Brillient! director Graham Rich tends to think not. Rather, he says the outsourcing of investment is in effect an investment strategy in its own right.
“Fund managers who outsource, hire and fire other managers in the same manner they hire and fire their own investment staff but keep those managers at an arms length. These managers should not change the adviser’s or client’s intentions and the only way that will happen is if the original managers fail in their process of selecting and assigning managers to investment styles and allocations,” Rich says.
“On the other hand, if the process is good and its delivers, does it matter how it delivers? As long as the adviser and client know what they are getting — which is returns with a lower risk portfolio, but lower returns across most markets. They may be slower on the uptake, but more resilient in a down market with a cushioned diversified ride as the end result.”
However, this shift to using external managers has not been without cost because while platforms, and some of their funds management-based parents, are able to offer more investment choice, they are losing out on the double dip, which is in effect the administration and investment management components of managed expense ratios.
Rather, the platforms and the fund managers face increasing costs in bringing these products to market through their own products.Dexx&rmanaging director Mark Kachor says these added levels of administration are one of the reasons that platforms are now asking for shelf space fees.
“In some cases they have lost revenue because they no longer do the investment management but they do bring those managers to many thousands of advisers and want to be rewarded for that part of their business,” Kachor says.
Yet in following the trail of money through platforms and into managers, Kachor says the path takes a twist, with the growth of multi-manager options on platforms now dominating the investment choice of many clients.
Dexx&r data for master trusts alone shows that more than 57 per cent of funds flowing into those platforms goes into multi-sector funds, while Australian and international equities, as pure investment plays, only attracted 9.73 per cent and 4.4 per cent respectively.
Despite this sounding like defeating the purpose of having investment choice in a platform, Kachor says the growth of multi-manager funds accessed through platforms removes some of the asset allocation decisions from the adviser and the client, and moves it to the investment professionals at funds managers and platform providers.
“Multi-manager funds exist, and prosper, because clients chose not to make the call on their investments but opt for diversification across assets and managers,” Kachor says.
“Research we have compiled shows that despite people talking about portfolio construction, 57.29 per cent of investments are still directed towards multi-manager funds.”
But Kachor argues that the combination of platforms and multi-manager funds can be a positive, as it takes advantages of attributes of both products.
“The real advantage with multi-manager funds in a platform is the client can change where the investments are held without fees, while the financial advisers usually keeps the business,” Kachor says.
“The only business risk is if the adviser provides poor service or the platform is uncompetitive and the client decides to go to another adviser.”
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