Wraps, Platforms and Masterfunds Conference

How would you frame the changes that we’ve just been through, and what do they mean to the platforms part of the industry?

GRAEME COLLEY
I think what you’re looking at is a dynamic change … you are seeing an industrial shift in the way in which [we’re] looking at pricing.

You’re seeing this shift in superannuation – we’re now seeing self-managed funds and industry funds starting to really dominate the markets. Having a look at Deloitte research … by 2025 the industry funds will start to overtake SMSFs [in terms of market share].

With self-managed funds, you’re seeing something that is a substantial part of GDP, which is really something to look at. Now, how can that fit in with changes to platforms? It’s that flexibility and costs that you need to look at, and it’s the range of investments … it’s that control element that people want.

So are you moving your products to take that up with self-managed funds, or are you doing something else?

If there’s push in the fast growth of the savings market [for] people seeking control, and that’s perfectly aligned with wealth, the controllers tend to be much wealthier … what does that mean for the industry and particularly, for platforms moving forward?

JEREMY PREE
What we’re seeing in terms of the platform space for sure is that proliferation of new entrants into the market. They’re not encumbered by large legacy systems that have to be re-engineered, so they’re able to be more innovative and design services and products that are tailored towards growing and changing investor demand – a proclivity towards direct investment, managed discretionary accounts, that sort of thing.

Clearly, what they don’t have is access to distribution. At the moment … it’s been very much controlled through the advisory chain, so they’re desperate to get some sort of distribution. That’s going to be a problem for them in the short term, so that’s why you’re seeing many of them struggle at that sub-one billion mark.

So that’s kind of what’s happening in the platform space. I think the end game for them is probably to be swallowed up because it is a scaled game at the end of the day.

The other thing I’m slightly fearful of in terms of a dynamic at the moment is the way the fees tend to be driving everything. And if you look at, say, the broking industry … that’s been under tremendous fee pressure for a number of years.

I’m not arguing that fees shouldn’t have come down because they need to, but what actually happened is that you had mass consolidation within the broking industry – brokers are a bit stupid in only valuing what they did in terms of the transaction.

So there are some parallels between broking and the advice industry, in that brokers didn’t really articulate what their value proposition was – which is advice – and didn’t know how to charge for that accordingly.

But my big fear is that if fees drive everything, in the platform space and the advice space we’ll end up with too much consolidation and less choice for the end consumer.

We’ve got to be clear about what we’re trying to deliver in terms of a service – our value proposition to our clients – before we even get into the competition over fees.

I’m not arguing that we should put fees up, but remember expensive is a relative term. It depends what other entrants in the market are charging, so let’s not compete fiercely on fees for that sake alone – because then we’re in all sorts of trouble.

It’s a natural demand though, the race to zero is really there. How are you going to solve the issue of distribution with [The ASX Managed Funds Service]? How is that going to be distributed?

CHAN ARAMBEWELA
[To begin, there are] a few misconceptions about what [the ASX Managed Funds Service] is and what we’re trying to do. People are referring to it as AQUA, AQUA II … at the moment we are actually referring to it as the ASX Managed Funds Service, but we’re looking at some rebranding.

It’s really about allowing fund managers to put their products up and have them admitted as ASX products. They remain unlisted, they’re not listed through the normal listing framework, but it’s really about getting them on the ASX. As a result, managers can have access to the ASX distribution channel, ASX broker network.

Obviously, we’re aligned with the ASX brokers in the context of distribution, but I think, importantly, a lot of brokers also provide services to dealer groups and advisers on that whole execution piece.

From our perspective, if we can get some quality funds up there alongside equities and all those other products that are on the ASX, we believe at the end of the day, investors will get better choice. Yes, from a distribution perspective, it will be driven through our brokers, who obviously have got their own commercial arrangements with dealer groups and others around getting access to ASX products.

Is that kind of blurring the lines between brokers and other more traditional dealer groups?

CHAN ARAMBEWELA
I don’t think so. I think some of that is probably just changing as a result of things like FOFA [Future of Financial Advice]. I think, generally, if you look at similar experiences offshore in terms of what we’re trying to do … you look at what happened in the likes of Canada 10 to15 years ago, there was certainly a convergence between the brokers and the dealer groups in that context.

We could be looking at something similar.

In a market that is splitting and evolving, and wraps, platforms and masterfunds rely on their amalgamation of funds, how are they going to play in that space and what do you think the opportunities are for them that are going to make them compete?

JEREMY PREE
If you look at it from a demand perspective, clearly there’s a huge demand from advisers [and] investors, as well as for somebody to solve the problem providing portfolio management, administration and portfolio maintenance.

When we talk about platforms trying to achieve scale, clearly one of the best ways you’re going to achieve scale is by addressing those non-custodial assets. I know that’s tricky and I know that the incumbent systems don’t lend themselves very easily to that, but when you talk about utility and when we talk about platforms in general, platforms can mean many things to many people.

What the consumer wants is one place they can do everything they need to do, whether they choose to unbundle that or not, and I think that’s the issue that we’re still a very long way away from.

[Also], I’d just like to talk a little bit about FOFA because one of the intentions of FOFA was to deliver more advice to more people, and the problem is that we’re still not really addressing that, and the unintended consequences of FOFA are actually going to drive people away from advice.

We’ve talked a lot about things that direct strategies and B2C strategies, and I’m sure we’re all busy working away behind the scenes to develop those B2C strategies.

Some of them have been imposed upon us… as a platform operator now, RG148 means you almost have to by default develop a direct strategy for your clients. We’ve talked about the channel conflict [which] that can actually create with your adviser channels and that’s something that needs to be managed.

But I think we’ve got quite a bit of duty to still support the advice industry and put in a range of measures to ensure that more people are actually getting delivered advice, and I’m still not sure that we’re really addressing that at the moment.

Part of your strategy is clearly to go direct and to be attractive to those types of people. How do you see that sitting with the other sets of distribution that are out there, and what’s your unique advantage going to be?

CHAN ARAMBEWELA
From our perspective, what we’re really trying to do is replicate what we do in the equities market in the managed funds base.

We’re not into tax reporting [or] doing any of those things; it’s really about efficiency and driving that through the ownership model we have in Australia, which is not traditionally a custodian nominee model, so it does allow the investors to directly own, but it still does rely on a distributor being affiliated with that.

That’s where the opportunities are. If you go back 10 years, platforms wouldn’t have had equities on their platforms. That was driven by demand from consumers. From our perspective, we’re pretty agnostic about where the flows come from. There are certainly opportunities for platforms to get on board on the efficiency side.

Looking forward in the SMSF space and its relationship with a platform industry, what would you say are the things we should be thinking about and concentrating [on]?

GRAEME COLLEY
I think you should split up your self-managed fund community. What our research has shown is [that] the controllers, you’ll never get.

The reason for that is they run their own show. But they do tell us that they [don’t] rely on financial planners because they think that financial planners are just setting up investment strategies for their own purposes. But they do rely on their accountant and their stock broker for what they refer to as ‘financial advice’.

The coach seekers are probably where your market is. The reason for that is that those people are looking for help with the operation of their self-managed fund, but they want to learn at the same time.

I think that they’re the sort of people you want because they get more educated in what you’ve got as a product and they’re able to use that product suitably for their self-managed fund.

The other ones that hand it over to you, I think they’re more in the adviser space, where the adviser would look after the operation of that fund and the client in that regard would be merely a passive observer in relation to their own self-managed fund’s operation.

JEREMY PREE
Certainly, when you look at SMSFs … that’s where a lot of growth is coming from.

There’s a huge proclivity towards Australian equities, as you can see. Obviously, there’s some direct property in there as well [and] not much in terms of international.

So there’s a massive diversification problem, there are concerns within the industry and not enough SMSF trustees are getting advice – it’s a very small proportion. It’s something we need to grapple with.

The other thing [that] is going to be one of the themes going forward is that clients who are used to being self-directed could potentially get themselves into a lot of trouble in the next few years. So how do we deliver that advice proposition to them and make it affordable for them to come to the industry?