A change on the horizon
AQUA II has the potential to increase SMSF investors’ engagement with managed funds, but there are many segments of the market that need to get on board. Will the service be a success? / Katarina Taurian
Historically, SMSFs have not been keen adopters of managed funds. However, the ASX Managed Fund Service (AMFS), commonly known as AQUA II, will make managed funds more easily accessible where SMSFs already shop – via brokers.
According to the ASX, AMFS enables the “automation of settlement of applications and redemptions for managed funds on the ASX”. This replaces the current paper-based system, which is “expensive, unwieldy and error prone”, according to Darren Speirs, head of portfolio solutions at Bravura Solutions.
There are several key hurdles the service needs to overcome to ensure its success – namely the participation of brokers. However, with the cooperation of the right players, AQUA II could potentially be a game changer for SMSF investors.
AQUA II’s ability to give easy access to a wide “supermarket” of managed funds is going to be attractive for investors, including self-directed investors, says senior wealth adviser at Quantum Financial, Tim Mackay.
“[For] SMSF investors, I see it as a great opportunity; I can’t see any downside, assuming they understand the risks that they’re getting into,” Mr Mackay says.
“SMSFs haven’t necessarily been keen adopters of platforms … but they have been good early adopters of ETFs and of direct shares ... those sorts of clients will have an existing account with their broker, and so this will be an easy add-on for them.”
Chief executive officer of Bell Direct Arnie Selvarajah says AQUA II can help SMSF investors focus on portfolio diversification and maximising investment returns, rather than focusing on the cost of administration.
“My sense is [trustees are] not well diversified in their portfolio construction, so this is where I think AQUA II has a great role to play,” Mr Selvarajah says. “So they might be saving $3,000 to $4,000 in admin fees, but leaving $15,000, $20,000, $50,000 ... by not focusing on the performance aspect.
“If they can start to access managed funds easily and cheaply, they could add different asset classes, different sectors, different geography [and] exposure into their portfolios and hopefully get a better result from the portfolio performance,” he adds.
‘THE SHELF WHERE SMSFs SHOP’
Typically, SMSF investors have not gravitated towards managed funds. According to a Tria Investment Partners white paper published last year, SMSFs have approximately 14 per cent of their assets in managed funds.
Transparency, the desire for control, and fees are often listed as reasons for their low usage, according to Tria.
“It’s an area that fund managers have been trying to tackle for a very long time and with very little success, with a couple of exceptions. It’s because the SMSF market is fragmented, difficult to find and difficult to target,” says Oliver Hesketh, senior consultant at Tria.
“Fund managers have increasingly been reliant on distribution via platforms ... some SMSFs have used platforms, but most of them haven’t.”
AQUA II puts managed funds in the broker ‘shopfront’, alongside individual shares, exchange traded funds (ETFs) and listed investment companies (LICs), according to Tria. With SMSFs being heavy users of brokers, the service gives managed funds the opportunity to compete on a more “level playing field”.
“It doesn’t matter how good your product is if you’re not putting it in front of your target client set,” Mr Hesketh says. “SMSF trustees do a lot of investing via their broker account now, and this is putting managed funds on that shelf where they shop.
“[There is a] potential for fund managers to sell products to SMSFs that really wasn’t there before.”
However, fund managers need to do more than simply make a product available on AQUA II. They need to understand the segment they’re targeting and choose their products accordingly.
“They need to put the right product on AQUA II ... putting their standard product on there isn’t going to work, and using their standard marketing campaign isn’t going to work. It needs to be targeted and it needs to be targeted to this segment,” Mr Hesketh advises.
While there is a “big market” for fund managers generally to exploit, Mr Speirs draws attention to the opportunities AQUA II presents for boutique fund managers.
“It offers [boutiques] a platform to distribute directly to a very large portion of the market that has been probably [difficult] to access,” he says.
However, Mr Mackay indicates the fund managers controlled by the institutions may see AQUA II as a threat to their existing business model and doubts they would be early adopters of the service.
“I imagine they’ll be adopting a ‘wait and see’ sort of attitude,” says Mr Mackay. “If the immediate pick-up is successful, [they] won’t want to miss out. If it’s not, they won’t encourage their existing clients to go down that route.”
Fund managers such as Magellan, although not on board with AQUA II yet, have given “every indication” they are interested, particularly if there is “genuine demand” stemming from their client bases.
“If [our clients] tell us that we should engage, that’s when we’ll push the engagement,” says Frank Casarotti, general manager of distribution at Magellan.
“Our application form can be up to 14, 16 pages long … [AQUA II is] an administrative convenience for the intermediary. We haven’t worked out if there is an absolute benefit to the investment manager, so the short answer is that I’m sitting on the fence in terms of what the benefits are.”
THE IMPORTANCE OF BROKERS
One of the most important parts of the market AQUA II needs support from is brokers, with some practitioners claiming the service will not be a success without the support of the majors. Tria expects some reluctance from bank-owned brokers, given the threat to existing and profitable business models.
“[It’s a] little bit chicken and egg,” says Mr Hesketh. “If they get one of the big brokers on board and that’s successful, the others will probably join in good time. If they launch it with only boutiques and the others don’t join, it’s probably not going to have enough momentum behind it to cause change.
“If AQUA II gets up and has broker support, we’re bullish on its prospects.”
Bell Direct is one of the first foundation brokers to sign up to AQUA II, and Mr Selvarajah says brokers avoiding the service may not understand the managed funds market or see this service as competition.
“I’ve always supported the idea of having a centralised infrastructure that allowed clients and financial advisers to transact in managed funds in a more seamless and more paperless way. [AQUA II] gives us that, using the existing infrastructure that the ASX has,” he says.
Mr Selvarajah also points out that Bell Direct made technical upgrades that were “not insignificant” and may be seen as a hurdle to other brokers. However, he emphasised that the benefits of the technological investment outweigh the costs.
Even if broker support eventuates, chief executive officer of BGL Ron Lesh says any change in the way SMSF investors behave is going to ultimately depend on the preferences of the trustee. Mr Lesh draws attention to the current swelling of interest from SMSF investors towards ETFs as opposed to managed funds.
“Whether it’s going to have a take-up [from] SMSFs, I think only time will tell,” Mr Lesh adds.
PLATFORMS: FRIEND OR FOE?
AQUA II could lack appeal to platforms because it enables the off-platform model, representing a potential risk to the incumbents, states Tria.
“The challenge for platforms is to innovate, to continue to make sure their solution is better than the off-platform solution,” explains Mr Hesketh.
OneVue’s chief executive officer Connie McKeage says, as a platform provider, she sees AQUA II as an opportunity, adding “people say that [AQUA II is a threat] if they have an indefensible position”.
“Do I think it’s a threat to a traditional platform [cost] structure? Yes. Do I think that’s where platforms should be today and is it a threat to that? The answer is no,” she says. “I think that the market is just changing [and] evolving.”
Ms McKeage says just as financial advisers have had to justify their value through the Future of Financial Advice (FOFA) reforms, it is inevitable that platforms would at some point have to do the same.
“I think there should be a downward pressure on platform fees,” she says. “If we unbundle manufacturing and then we unbundle the value of administration tax and reporting, everything along that value chain needs to be justified as a standalone value proposition.
“The poor advisers spent the last couple of years looking at how they’re going to justify their value to a client and to charge a particular price. Why shouldn’t we, as a platform, be treated equally?”
Ms McKeage also says it has been difficult to keep SMSF investors on-platform because there’s not currently enough breadth and depth of products and services on offer.
“You are not going to get SMSF clients if the product on offer is just managed funds and listed securities,” she explains. “They’re looking beyond the core assets ... The whole point [of] SMSFs is they’re self-managed and self-directed, and therefore you need to have choice.”
While AQUA II may be a potential competitor to platforms, the success of the service won’t necessarily be catastrophic.
“Platforms [have] been around for a while. They have large budgets and a good name in terms of administration. Certainly, it will change things for them, but the nature of platforms is that they will evolve,” says Mr Casarotti.
He also says that while AQUA II may pose a threat with older platform technologies, he believes platforms will find a way to engage with AQUA II, and be guided by the level of demand for the service.
WHAT ABOUT ADVISERS?
Despite rhetoric from the industry that AQUA II will diminish advice, Mr Speirs says the service presents an opportunity for advisers to become more involved in SMSFs, particularly given FOFA requires advisers to consider what value they can offer their clients.
Mr Mackay adds that he doesn’t view the service as a threat, but rather an extension of what advisers can offer their clients. He also says Quantum views financial planning as holistic, with investment being just one factor of the total advice experience.
“We’re not going to lose any clients on the back of this,” Mr Mackay says. “Anything that increases competition [and puts] downward pressure on product fees can only be in consumers’ and our clients’ best interests.
“We’ve already been early adopters of ETFs and they’re no different to that. ETFs [are] a great opportunity, it’s certainly not a threat, and the same goes for AQUA II”.
“It will give us more tools in our toolbox to be able to advise our clients. So from our clients’ perspective, it gives them great access to a broader suite of investment products.”
Mr Mackay believes early adopters of the service within the financial planning realm will be those who advise on SMSFs, and potentially those who have shifted away from platforms.
“Those sorts of advisers that have already stepped down that route will probably find it attractive to add the AQUA [II] investments into their supermarket of products that they offer their clients,” Mr Mackay says.
TIME WILL TELL
Those in the industry who are claiming AQUA II won’t work are “trying to talk it down”, according to Ms McKeage, who says she wouldn’t be voting against the “sheer power of the stock exchange”.
“I think there’s less risk in thinking that it will work and getting on board with it than trying to fight it and thinking it won’t work,” she says. “If it doesn’t, there are always contingencies. But if you try to fight it and you think it won’t and it [does], that could be a massive defeat.”
Mr Casarotti adds the ASX will need to prove the technology and the consumer experience has been “worth the effort”. However, he says the ASX would not be expecting market dominance overnight.
If AQUA II has the support from critical market segments, it has the potential to cause change in investor behaviour, particularly those with SMSFs. However, with a variety of opinions surfacing from every corner of the industry, it appears only time will tell if the service is set for success.