What it feels like to be in the shoes of a platform provider right now is anything but steady. Platforms will play a critical role for financial advisers in administering elements of the Future of Financial Advice (FOFA) reforms, such as opt-in. But too much toing and froing has seen platforms miss out on crucial progress last year, despite pushing ahead with enhancements and fee slashing.
Providers of all sizes are feeling the imminent pressure of the 1 July 2012 deadline. With Plan For Life data showing funds under management (FUM) of platforms down 4.2 per cent and wraps down 4.3 per cent for 2011, mixed in with an intensifying cost-conscious movement from investors and advisers, the next few months will determine who is capitalising on market opportunities and who is stumbling behind.
The Investment Trends Planner Technology Report July 2011, based on a survey of 1394 financial planners, found advisers invested 72 per cent of new client money via platforms, which has eased downwards over the past few years from a long-run average of 79 per cent.
"This reflects a shift towards more listed investments, such as direct shares, and cash and term deposits, which are traditionally done off-platform," senior analyst Recep Peker says.
Another worrying trend was 24 per cent of advisers stopped using at least one platform in the past year.
"While it did decrease from 31 per cent in 2008, it is still a high percentage," Peker says.
Generally poor service and support, and administration and processing errors are drivers of switching platforms, though recently, fees have become a greater driver for planners to cease the use of a platform.
"We probably didn't make as much progress in 2011 as we would've liked because of the lack of clarity from FOFA," IOOF product general manager Renato Moto says.
"Last year saw the business move from a simplification and rationalisation mindset to one of trying to innovate and evolve our products."
Whether the future looks better or worse, Moto and his team will spend the first half of the year focusing on regulatory change, predominantly opt-in and what role the IOOF Pursuit platform will play in the opt-in equation to assist advisers.
"We're [creating] a platform model that will accommodate the adviser's model. We've got to be careful that the platform doesn't dictate to the adviser how they should run their business," he says.
The Planner Technology Report also found that between dealer groups, planning software and platform providers, 46 per cent of advisers are looking to platform providers to help them administer opt-in.
Colonial First State (CFS) product and channel development general manager Peter Chun says it has already developed a "tick-the-box" approach for its three opt-in models: full service, hybrid and low touch.
"The approach we take is plan for the worst, hope for the best, meaning we're building the bits that have been outlined [in FOFA] into our systems and if it turns out that [Financial Services and Superannuation Minister Bill] Shorten wants a five-year opt-in, we'll then alleviate the burden on the planner," Chun says.
Providers at the larger end have also echoed similar sentiments in their preparations for the opt-in measure.
"For a platform as large as ours, we can't afford not to plan and make sure if suddenly come March when this [legislation] is passed, you're not ready 1 July," Chun says.
The enormous amount of change hitting the FirstChoice and FirstWrap offerings is costing the business dearly. "But it is what it is. We believe some commonsense will play out and there'll be a 12-month transition period to implement this," Chun says.
He says market volatility is another significant issue for CFS platforms as it continues to be the driver of negative consumer sentiment, therefore alternatives and income investment solutions were added last year to allow for better diversity. "We also streamlined by taking the data from Xplan and Coin and it automatically pre-populates into FirstChoice into our front-end adviser portal," he says.
He says the third major issue this year revolves around the threat of industry funds and self-managed superannuation funds (SMSF). Industry funds, in particular, have managed to secure a significant slice of the superannuation market, driven by low fees as well as the sector's advertising campaign, while many investors are still continuing to establish SMSFs.
BT Financial Group (BTFG) adviser distribution general manager Chris Freeman says while industry funds have done a great job, they inadvertently spread a negative message on advice.
"It's incorrect to say if you're with a financial adviser, you're paying fees, so you're worse off. What they don't talk about is the value that you get for those fees. They're just saying it's another cost so a lot of people just get turned off by advice," Freeman says.
He mentions plans for increased market share in the SMSF market, although further dealer group consolidation in light of the FOFA reforms remains top of mind.
"It's public knowledge that Count's been one of our three biggest relationships in the BT Wrap platform space and it's been bought by a competitor," he says.
"But we'd like to think that because it's a franchise operation and run by small business people that have been using our wrap for almost 15 years, if we continue to offer the best platform at the best price [with] the best service, we'll continue to be successful with that strategy irrespective of who owns the dealer group."
Simply put, Freeman is optimistic BT Wrap will remain on Count's approved product list (APL). "It's a big deal for an adviser to change platforms, especially if someone buys a dealer group and makes them change. That's when you start losing clients," he says.
While the rest of the platform providers are mindful of the consolidation occurring in dealer groups, Chun thinks the industry is still incredibly competitive with many players.
"Any mature industry will have consolidation. You get these phases: new industries have a lot of growth, start-ups and a lot of new entrants, but mature industries naturally have consolidation," he says.
The Planner Technology Report also highlighted that planners invest 73 per cent of their platform flows through their primary platform, with 23 per cent of those surveyed saying a BTFG platform is their primary platform, ahead of Commonwealth Bank of Australia (see chart).
The removal of conflicted remuneration in the form of volume rebates paid by platforms to licensees could therefore be the greatest drawback to maintaining that number one relationship.
"It's our whole business model that's potentially under threat, so we're very concerned about what's happening with FOFA," Freeman says.
"We support 100 per cent the removal of any payments in the industry that conflicts advice. But the payments or the margin we collect from the end investor and pay back to the dealer group, not the adviser, does not constitute a conflicted payment.
"That, in a nutshell, has been our biggest source of frustration. We don't think that's conflicted remuneration."
The industry has failed to recognise the difference and while attempts to clarify this to Treasury worked, it ultimately became a political matter, he says.
The very real possibility of a volume rebate ban has therefore pressed BTFG to create a wrap that will mark a major turning point in the industry and will change the way advisers do their business, as the emergence of master trusts and wraps did, he says.
The group announced its new division in August last year, led by general manager of business transformation John Shuttleworth, set with the task of designing and building a next generation wealth platform that's able to support the evolving needs of advisers and investors. Freeman says the project is "bubbling away".
SimpleWrap director Krystyna Weston says larger providers will be throwing money at retention.
"There was a lot of complacency last year, but as FOFA becomes clearer, a lot will try to lock in business and clients," Weston says.
"If you look at the traditional platforms out there, there are some phenomenal incentives that have been grandfathered and a lot of those groups aren't going to walk away from that or they're trying to lock those in for as long as they can. Strategically, it would cause them a lot of grief to lose certain accounts, [particularly] with very little cash flow and new business coming through the door."
She says while those that can afford it will do everything they can, money won't always work. "Sometimes it'll be about integrity, sometimes it'll be about relationships, trust, service and history," she says.
She points out there is a trend of dealer groups wanting to build their own platform models. "It started to pick up late last year and we'll start to see much more of it this year. [They want] to have their own models and APLs catered for," she says.
The platform space can also expect more competition with the March launch of Australia's first dedicated responsible investment (RI) wrap, Emerald Wrap, delivered in partnership with Powerwrap.
Emerald Club co-founder of wrap distribution Justin Medcalf says there has been adviser-driven demand for a non-institutionally-owned wrap solution that could not only meet the needs of a very fee-conscious consumer base, but also the growing demand for additional RI funds in one place.
"There's starting to be more buzz around responsible investing within in the retail space [due to] solid returns in all time periods and/or asset classes, as per the Responsible Investment Association benchmark report," Medcalf says.
He says while advisers are happy with the platform solutions available to date, independent financial advisers are looking for "an added edge", which non-alignment happens to offer.
Previous experience running advisory practices has allowed Medcalf to conclude there isn't a huge amount of differences between platforms; it's fees and service delivery that it really comes down to.
"We still need to be on our game in those two areas. We can't just wave our ethical responsible investment flag and hope that everyone's going to be interested. We understand the commercial pressures of running a financial planning firm and our role therefore is to make that as easy as possible for advisers," he says.
He says a lot of smaller dealer groups will start to see non-aligned wraps as a viable option, especially as volume rebates start to shift their business model and revenue streams.
As others anxiously restructure, Macquarie is sitting pretty with the least amount of work to do, due to its already compliant and FOFA-ready offering, according to its head of platforms.
"We're not really feeling pressure. The reality is, Consolidator is already to a large extent pretty transparent in terms of how advisers can charge fees," Justin Delaney says.
"I don't think there's anything we really need to change in order to meet regulatory needs, other than anything really specific that might be required from advisers."
He spells out a "fairly vanilla year" for the group's platform activity with more focus aimed at bedding down and developing functionality across Perpetual's entire wealth business, which was outsourced to Macquarie last year. He says: "$8.7 billion of new money that's going to come to our platform is significant."
The industry is now at a mature point where transparency, competitive fees and choice have answered the requests of advisers. "From day one, platforms really brought choice to the market and the better something gets, the higher the expectations continue to become. History suggests that we've delivered and will continue to deliver," Medcalf says. «
