Pros and Cons of paying fund distributions in cash - Column

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The Federal Government bangs on about providing choice, diversity and competition in financial services. But you could argue the reverse has happened, and I will do just that.
The Federal Government bangs on about providing choice, diversity and competition in financial services. But you could argue the reverse has happened, and I will do just that. But to show the real schizophrenia in my personality, I will also argue the industry is on the verge of real change, which will lead to more choice, diversity and competition, which will be mainly be brought about by new leftfield players. And this change will happen in spite of the regulators and entrenched interests.

Anyone who has read my articles this year would know I have been preoccupied with the changes I see imminent in our industry. I see these changes having a profound impact on our industry at all levels.

But can I start with the new leftfield players? Did Microsoft ever think Google or Yahoo would be their competitors? Did record or TV companies think Apple would be their competitor? Did the banks think GE, when they sold their cards businesses to GE, would be their competitor? Closer to home, IBM buying Russell?s superannuation business, what does this mean? And now AAS is for sale ? who will buy it?

Morningstar has just acquired Aspect Huntley, the publisher of this magazine, not long after Aspect Huntley bought InvestorInfo, the owner of IFA. Change in this industry is rampant. Why? It?s simple: it?s a highly regulated industry, with the core players needing to be licensed, with mandated growth. And, I nearly forgot, one with healthy margins.

Financial planners may wonder what any of the above has to do with them. But it will have impact both indirectly and directly. Indirectly because there is consolidation and new owners of the suppliers that they have been used to dealing with. Directly because soon they will start to see some of these new players in their own space.

My regular readers would also know that I?m seeing the Australian Stock Exchange (ASX) as a significant competitor to fund managers. Recently I was told the ASX is actively promoting the idea that all manager investments should have to be listed. There is an overseas precedent for this ? in Holland all mutual funds are listed. If this were to happen here, who would be most impacted? Fund managers ? possibly not.

Platform providers ? yes. Financial planners ? yes too.

The Australian Prudential Regulation Authority (APRA) has just successfully reduced the number of super trustees from 1,500 a few years ago to just over 300. The outcome of this will be fewer super funds meaning less opportunity for investment managers, custodians, asset consultants, research houses, administrators, software providers and insurance underwriters. Congratulations APRA, this is really going to lead to choice, diversity and competition. This follows on from one of the similar objectives of the new Australian financial services licenses under financial services reform. The outcome of that was fewer licensees.

Regulators seem to believe if they have fewer larger licensees to supervise there will be less fraud, corruption and dishonesty. Well, I?ve been in this industry for more than 30 years and seen many changes to the regulatory environment. Have these changes reduced fraud, corruption and dishonesty? What do you think?
Entrenched vested interests promote the benefits of size and consolidation as this protects their position.

At almost every level of our industry we have a few dominant players. The concentration in most levels is worse than 80/20. If we rename these levels as the value chain, the degree of vertical integration makes the concentration even more acute. Take NAB (sorry, nab) as an example. It has significant tied distribution (financial planners), research and asset consulting capability (for example, JANA), platform capability, custody (NCS) and funds management.

But in spite of the regulators and the entrenched vested interests, change is happening and will happen. Leftfield players see the opportunities in this regulated, mandated and profit-laden industry. They see it as an industry with few barriers to entry.

New ways to deliver advice are emerging and an increasing number of people are going direct; once again a space the ASX is very active in. And why not, given the majority of planners could appear to be compromised by the outcomes of the acute level of vertical integration in the industry.

Even financial planners should not see themselves as a protected species in the advice area. The 2006 budget changes will affect financial planners, especially at the high net wealth end. Planners will have to decide whether they want to be investment advisers or financial planners. Being a regulatory arbitrager is no longer an option.

Consumers will also drive change. They are embracing and will embrace change, for example, ING Direct and ComSec. Financial planners, if they want to stop being the fall guys for the rest of the industry, should be listening to their clients and seeking out the new ways and the new players to better satisfy their clients' needs.



Pros and Cons of paying fund distributions in cash - Column
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