KK: In terms of the platforms sector, what does it consist of today? Is it mainly a mix of large players and smaller independents?
CL: I suppose if we look at market share, there's a small number of large players, but I think there's equally a large number of small nimble players in the market as well. And so I think it's pre-born out of old product structures that have come into wrap platforms. So I think it's a bit of both, but you know you get your traditional market shares, a small number of large players but, you know, we are always looking at the small nimble players out there in the market as well.
TP: I think managed accounts in fact has been the cause of a number of those small players coming into existence, so when I think of, you know, Hub 24 or Onevue, it's been a driver to offer that managed accounts service, which has led to the small players getting going.
TM: I guess we take, unlike the ACCC (Australian Competition and Consumer Commission), a fairly broad view of what is the platform space. In fact, platform's probably not the right word because we see administration solutions as from self-managed super funds, you know, which is a highly fragmented, you know, self-managed super fund administration compliance to traditional wraps to industry funds, we see as a platform. I'd be very interested in people's views on where they're going as a platform and public sector fund. Public offer, public sector funds we see as a platform and also the newer entrants who are looking at that IFA (independent financial adviser) market.
A lot of people tend to focus on the interplay between the traditional, for want of a better word, platforms and the new age Onevues and Hub 24s, but we think that kind of misses the fact that there's these other forces at play as well, which is self-managed super funds, which is the largest and the fastest growing. And what is it? It's an administration system at the end of the day. And industry funds, an administration system at the end of the day. Well ... a few other things.
NM: It's interesting Tony said that industry funds are possibly seen as platforms because there are a number that do offer, say, direct equity as trades. Unfortunately their execution is pretty poor . but I suppose you could see them as a competitor in some ways.
TM: Well particularly if they stay in their own adviser groups they're going to have to give those advisers see-through and they're going to have to start doing the things that the platform traditionally does in order to be more useable and user friendly to the advisers. Well that's opened up a whole new ballgame.
CL: What are we? We're a mechanism to administer assets, that's what we are. So you're right, it could be self-managed, it's all the same.
MP: I think the important point that you raised there is like in this regulatory review environment, particularly about rebates, who is attacked on the traditional platforms, and all these others pay some form of discount or costs back to the adviser and it doesn't seem to have come into the scope of discussion. I think that's pretty clear because if these non-traditional or kind of non-retail players are out there forming these different service providers and looking more and more like a traditional platform, then they've kind of got to play in that same field.
TM: They've got to have the same rules haven't they?
MJ: I think that stems in relation to separating product from advice. Because do you start to have those platforms that are subsidising that advice, if they do want to be a full platform and have all the bells and whistles and move in that retail space? I think we fundamentally missed the point about advice - and I take Tony's comments on board, platforms are just an administration tool. As soon as we get away, or as soon as we identify that that's all they are, and then add an advice component and the cost of the investment on top of that, put a line under that and that's a total cost to the client, once we all realise that, once the whole industry realises that we can start moving forward in terms of articulating the value of advice, what advice is and then working out how much someone will pay for advice, what advice do they need, and then we'll start to put a price on actual advice.
But consumers within Australia have had this luxury of actually not paying for advice, because product providers have paid for it. And that's why it's so hard for advisers to be able to demonstrate their value proposition. So it's interesting - that's where I see the industry, where we are right now and obviously where we're meant to go with the comments that the government's made through [former financial services minister] Chris Bowen in terms of regulatory reform for the industry.
TM: That's absolutely right and that leads on to the 800 pound gorilla in the room because, you're quite right and you say you want to be able to identify the value of advice and the value of the investment solution and the value of the administration solution and you want to make sure Australians are getting advice at the appropriate level, and we absolutely recognise that not everyone needs full comprehensive advice all the time. I mean DIY (do-it-yourself) might not ever need full comprehensive advice, although that would be a shame if they didn't get it at some stage in their life.
MP: I think the key is that platforms have imbedded advice processes in there. And that's why the whole scrutiny of platforms is there. Where it should have always been, what it was started for, was admin and executing the advice but because of adviser demand, and I can kind of speak in that because I was in that case for years, you want them more from the platform, so you're like "add this functionality, do that", and that was actually to try and make the advice business more effective. So in trying to solve advisers' efficiency solutions, it now has imbedded advice practices within the platform. And that's inherently where the problem is. And the other important component that we see the value and then smaller players coming up is in these big players, the service that the advisers receive is just silver standard service.
Like the reporting, the processes, the distribution, the touch points, the client servicing, these cheaper guys coming into the system, advisers expect the same from them but the cost is there. So I think what will eventuate over time is once advisers are in them and imbedded in them and realise the reality is you do a hell of a lot more there than what you're doing over here and the additional costs back to your business, it will come back to, well, kind of now I'm stuck with all of these pieces.
CL: There's almost a nimbleness in the technology that gets the headlines, rather than the whole entire service and we will eventually get beyond functionality where everyone will do the same and it will be, well what are the other components that we offer that you can put on the table to provide them the full service.
KK: So how do you think the larger platforms can regain the industry's attention in putting forward the advantage of offering advisers a full service?
MP: I think the smaller advisers, you know, self-licensed, boutique et cetera, they'd be looking for their own solutions. The larger dealer groups or licensees I think understand the value because they can see the efficiencies that it brings back into their business. So in what we're really doing I think to the industry is fragmenting it even further. And it comes from having clients wanting to go direct and you have these advisers wanting to have their own licence and then dealer groups and solutions for them. It's like white label solutions where they can get more control, be the IDPS (investor-directed portfolio services) provider. So I think the platforms can be flexible to offer those arrangements and then the licensee can feel more in control as to that platform providing them a better match to their business in a kind of one size fits all.
TM: That's absolutely right. From a user's point of view, the two big questions that you ask yourself when looking at the new entrants is how much of the costs is actually being pushed back to you as the user. So you ask yourself that question which is your efficiency kind of issue. The second thing you ask yourself is there will come a point in time when there is a large capital outlay to maintain the systems, and you've got to satisfy yourself as a user that that can be met because if you look at all parts of the value chain, the platform side, or the administration side, the self-managed super funds is probably the most capital intensive. So it's a big issue for a user on those two issues.
Similarly the industry funds as a platform, you got to ask yourself the same question. How much is being pushed onto you as a user of that platform? And how are those administrative funds going to manage their capital requirements going forward to stay competitive and vibrant could be an issue for them. MySuper has just thrown a hand grenade in on that one, in our view, because the capital requirements in MySuper, I don't know your business all that well but I suspect they are 'ginormous'.
TP: It seems to me that the entrenched providers in fact are coping pretty well with responding to the pressures of new entrants and are assisted enormously by just the difficulty of relocation of existing client business. And the inefficiency, to Marianne's point, the inefficiency of having multiple platform relationships. So I think those established providers have got a pretty significant competitive advantage from entrenchment.
CL: The new players are sort of targeting different segments, accountants, self-managed super funds, which probably has the lowest barriers to entry, highly fragmented industry, easy to get a foot in the door in a few different spots to get a bit of traction. And that's sort of how they play. It's not a core, big dealer group area.
TM: Our view is that there's been a fundamental shift in the consumer and that's the thing that's actually driving a lot of this change in the industry. The regulator is simply echoing some of those consumer issues and those consumer issues around "I want greater flexibility in the use of assets, direct to ETFs (exchange-traded funds)", and they're also saying "guys, it's too expensive". The whole lot is too expensive. And you look at self-managed super funds; they're seen as inexpensive by the consumer, which arguably they are allowed, and secondly they're seen as flexible. So that's the challenge for the new players and the established players, without blowing any costs.
TP: We're going to be operating, looking out for the next kind of two or three years, we're going to be operating in an environment where the general awareness of costs is going to be heightened compared to what we experienced before. That's partly going to be driven by regulatory issues or just media coverage, so I'd expect to see tonnes of coverage from [Financial Services and Superannuation Minister] Bill Shorten on "this is too expensive" and that'll be echoed by the mainstream press and that will have an immediate flow-on, as Tony said, from Mr and Mrs Smith saying to their adviser: "I'm looking in the paper and seeing I should be paying 0.65 per cent. Explain to me what you're charging me."
KK: That's an interesting point to raise. In terms of the most pressing reform changes to the administration sector, what are the biggest difficulties?
MP: The big one is obviously about payments and where they sit, and there hasn't been a re-engagement with Treasury yet. So once the election was announced, all the discussions had stopped. So now that the cabinet is announced, I don't think Treasury started re-engaging.
So for us it's just, I think through the FSC [Financial Services Council] and groups like ours kind of merge together to come and talk. I think the propositions that we took was to explain what these payments do and focus them on scale benefits that it gives back to an adviser, and what we're going to focus on and stand at. I think Treasury have a better understanding of what ultimately these payments are. They would have seen over a thousand people, I think, come through their door in the last six months. So I think the engagement that we have is that they do have a better understanding, but it obviously just comes back to now, you know, what the new minister thinks.
CL: Same thing. [It's also about] education, really focusing on service versus product and explaining the nature of the payments and what they're for, and that they are different to your sort of 10 per cent upfront commission for flogging products-sort of payments. That was very much what we were being - and in general now very much for the FSC and their work that they're doing, they're working together with all the platform providers.
TP: I think the interesting thing to me is that it's being driven by Treasury, not ASIC. You know, you would have assumed that the natural driver of this sort of area would have been ASIC, but in fact it's being driven by Treasury because there's an agenda to get economic transformation within the industry. I think that Bill Shorten's appointment wasn't by any means a matter of "by the way, who do we think we can put in this slide?" I would say that straight after Kevin Rudd, Bill Shorten was up there saying "this is the one I want". So I think we're in a pretty heightened political environment here. And that's going to put a lot of pressure on all the players.
MP: And I think if you keep just going back to what the principle and the context of, you know, it's got to be payments that are advising advice and if you take it back to that - and that's where kind of this morphing of the platform has got some advice processes executed in there. So I think the most important thing is, from a platform to a licensee, it's pretty clear that it's not going to bias advice because that's about scale and efficiencies in that advice business. So probably the payments are more about the licensee to the adviser, which definitely the groups that we work with, you know, we've included them in kind of our efficacy work to say, well they, one, appear not to be there, or appear to be transparent. And it doesn't influence the advice process. If it doesn't influence the advice process, you assume that it should be okay.
TP: My concern with that argument though is that you can advance the argument that the B2B payments don't buy us advice at the product level. I mean, you can substantiate that, but if the regulatory driver is to reduce total cost, then the regulators are going to sit there and ask themselves: "Well why did the client end up, regardless of the investments they ended up with, why did they end up paying 250 basis points when you as an adviser could have put them into an Australian super of 95 basis points all finished, plus whatever fee you wanted to charge?" And I think that would be my concern about the line of argument.
MP: I don't think it goes to that level. It still comes down to the adviser. The adviser's got the fiduciary responsibilities that come into it. So it's not about, "What's the cheapest platform that the client could have got in?" It's about the service and the value.
MJ: Consumers are driving the fact that they want a cheaper overall cost for superannuation and investments. And I think before the client wants that they just want transparency. At the moment the consumer cannot make an informed decision on price because he doesn't understand basically all the sub-payments and rebates and bits going over here and subsidised advice. He doesn't understand that model. And nor should he need to understand that model. He just should need to know what he pays for the overall advice.
And platforms should be just saying: "This is what we offer, we may not be the cheapest but this is what we provide in our value proposition." And whether you're a large platform or a small platform like us, you should be able to articulate the value proposition for the adviser and ultimately the consumer and charge a fair price for that service, and let the consumer and the adviser make a decision on that.
TM: Absolutely. I think Marianne's spot on. I mean the adviser is a fiduciary to its client whether it's legislated or not. Our view has always been we're a fiduciary. If that's the case, then you're quite right. Our job is first of all to work out what that person wants, and then put them in an appropriate solution, and the price will vary depending on that solution, and then that solution has to be utterly transparent in terms of the total cost. And I think also we need to explain in a very clear way if asked what the component parts cost us. But to your point, you can't say to the consumers "everyone should take a low-cost option", because they don't want to.
MP: I think the other component is also risk, like capital of the players and risk. And I kind of see it like what happened in investment markets with, you know, the flock from big players to boutiques. You know, the GFC (global financial crisis) came out, a lot of them fell over and the flock was back to the big brands. And then advisers are kind of left questioning boutiques. I see that going forward for all these new players coming out. So the trend is now to kind of think that's a way of reducing costs.
But once they realise how much extra work is involved back into their business and, secondly, for these players to continually keep up to date with the technology and the cost that the bigger providers provide and then they realise they don't have all the services, like client services backing them up or if there's an administration error actually that won't be looked after by the provider, I think then that will be kind of an issue for a lot of these small players and who will survive, I think, over the next 10 years.
MJ: Well, we actually ran a survey last month in relation to "How did your platform performing in the GFC?" And the comments I got back from advisers was post-GFC, and that's presupposing that we don't have a double-dip, but post-GFC, advisers realised what does work and what didn't work. And they realised that actually platforms in general, and I'm not just saying us, but platforms in general actually helped the advisers, especially with the frozen fund issue, the amount of technology and efforts that platforms had to put into that in relation to - we had about 60 funds that were frozen, predominantly mortgage funds, property funds, and we managed that on behalf of the adviser back to the client.
TM: Yeah, it gets down to the consumer. We're largely platform ambivalent to a certain extent although obviously we do form partnerships with people in order to get the right result for the consumer, but in defence of the new players and in defence of the industry funds, and I'm hugely a fan of the traditional platforms as well, but at the end of the day it is horses for courses.
If you are a practice out there who's largely high net worth and therefore has a small number of clients with a large FUA, and he's doing a bit in the self-managed super fund space because you probably are in the high net worth space, then some of the new entrants with their technology, they will work perfectly well for you and they're a very, very good solution. And you probably don't need the scaleability that we do on the traditional platform. Ditto with an industry fund.
If I've got a whole customer base of, let's call it mass market kind of people who want a very, very good robust, I'll call it basic solution, without a huge amount of functionality and let's say I want $200 a year worth of advice . an industry fund might be the absolutely perfect ideal solution, as long as that industry fund was happy for me to see through the whole thing so I can advise my client and behave like a fiduciary. That has been an issue with some of them. So to my mind, it's not about are traditional platforms better than the new entrants or better than entry funds, as a fiduciary to the customer. I don't enter that debate at all. Where we come from is "okay, what's the right solution to that particular customer?" And in the best world it would be a total level playing field and let responsible advisers and their customers decide which one works for them, not which one is better or which one is morally right. Frankly I find that frustrating. At the end of the day, which one works best for that particular customer?
CL: The first question is: "What does the customer want?" And the adviser goes: "Can I implement there? Yes I can or no I can't. Okay, you need to change this or I will move and add this piece of functionality." So the first question is: "What does the customer want?" not "Here's what the platform provides, this is want I can provide to you." It's: "What do you want first and if I can't execute it back here I'll go somewhere else?"
TM: And which is why the government need to go through with the reforms which absolutely disconnect payments from the product manufactured to the adviser. Get rid of them. No doubt about it.
CSA: Matthew, you made the point about advice and that platforms helped with the GFC. Now we've got individually managed accounts (IMA), where do you see the implications now for platforms? Do you see them as a threat?
MJ: I think basically it's up to platforms to listen to the advisers and dealer groups that are using the product in terms of products they require and the enhancements they require and the functionality. So sometimes it can be reactive rather than being on the front foot if you like.
But that's - I mean we've just recently put on ETFs, we've all got term deposits and IMAs and SMAs (separately managed accounts) may be a part of it in the future. So I'm not going to rule that out. It'll just get down to demand.
TP: Managed accounts are really a way of advisers being able to say to their clients: "This is the way I'm going to articulate my advice relationship with you. This is the advice I'm giving you. This is how I can best express it." So managed accounts have really become a response for advisers looking to make quite clear to investors what their service offering is. You know, they've been given impetus by technology developments and I think really just by the regulatory change.
MP: The only thing that I was going to add about the individually managed accounts and shares is while the platforms need to respond to adviser demand, and if you go back to what Matthew was saying, is you've just got to realise like yeah, what are they reacting to? Like is it that they're looking for a cheaper product or are the dollars actually there to go into these products? Because these things have been around for a long time and no-one has been successful at making them successful if we look at dollars in the door.
TM: So Nathan, given all that and given the growth of self-managed super funds, will there ever be an industry fund which effectively is not different to a vertically integrated one-stop-shop wealth manager?
NM: There basically already are. You look at AustralianSuper. It's the behemoth. Industry Fund Financial Planning, AustralianSuper put their largest shareholder in that. Superpartners as the administrator are the largest shareholder in that, Industry Funds Management are probably the biggest investor with that so it is already quite vertically integrated and that is probably one which is going to become a much more dominant financial services organisation. You can also throw into that Members Equity bank - it's the dominant shareholder of that. So it is morphing rather quickly.
TM: So you can see it now, 2015 Cerelli Report Mark II, five vertically integrated industry funds, five vertically integrated platforms, five large dealer groups who are big enough to be vertically integrated and Toby's point, hopefully, hopefully smaller IFAs who are a rifle shot niche player, probably in the high net worth space who are leveraging off some new technology industry.
Because to Toby's point, if that's not the case, that would be a bit of a tragedy. But it is a challenge for all of us, because that's not a lot of industry funds, not a lot of platforms and not a lot of dealer groups.
MJ: So we're morphing is what's happening. Industry funds are coming up to this, the state of retail master trust, and retail master trust is saying: "We're happy where we are in terms of functionality, we just need to be a little bit more sensitive on our pricing structure, so we're moving down towards you guys, you guys are moving up." And Tony's outlook for 2015 sounds like it's pretty much on track, which is unfortunate.
TP: Maybe it is, maybe it isn't.
