Margin Squeeze

PLATFORMS ARE a critical part of the financial advice value chain, connecting advisers with asset managers, while also providing key administrative and reporting functions. As technology has advanced and competition has increased, providers have also had to deal with several years of financial market volatility and unreliable returns.

Platforms providers have a critical role to play in helping advisers manage their businesses more efficiently, while also having to deal with cost restrictions themselves.

Every point is precious
With so much pressure on margins and so much competition, a couple of basis points can make all the difference to which platform an advice group selects.

One of the key challenges for all platform providers currently is the pressure on costs right across the value chain, and a growing expectation for low cost services.

Financial advisers have already felt costs pressure in the wake of the global financial crisis (GFC). However, they are now seeing new pressures, with regulatory changes imminent – notably Future of Financial Advice (FOFA) reforms, which include changes to remuneration structures and additional fee disclosure obligations and opt-in notices.

Platform providers themselves are feeling the pinch for the same reasons but at the same time, they are being expected to help advisers meet the increasing costs – both in functionality and pricing – of providing advice.

This margin squeeze has been evident in the platforms space from recent industry announcements.

David Lane, chief executive of the CBA-aligned, accountancy-focused dealer group Count Financial, recently outlined changes the group has made in response to planner demand.

Lane tells ifa that when CBA first took over the business, it was surprising how hard it had been hit by the GFC, with cost reduction a major focus from the time of his appointment in late 2011.

“When I went around early on and spoke to people, the biggest issue was platform pricing – any way you looked at it we were out of the market,” he says.

“When the platform pricing was initially put in several years earlier, it was quite sharp, but the world changed, pricing went down and Count’s hadn’t been reduced.”

The result was the negotiation of a 20-basis point pricing reduction on the group’s access to the BT platform, an equal reduction on the Count-branded CFS Custom Solutions platform, and the replacement of the group’s old Skandia product with the IOOF Pursuit platform – “at a better price point than the existing product”, according to Lane.

Westpac, in its recent financial results, said while the bank benefited from strong inflows onto its Asgard and BT Wrap platforms, revenue growth was partially offset by margin compression.

“It’s just [due to] the introduction of lower cost platforms; obviously we’ve launched Infinity [eWRAP, a flexible-pricing option on Asgard in late 2011],” BT Financial Group’s head of platform product, Kelly Power, tells ifa.

“It’s the trend from high-margin heritage books into low-margin newer products. That’s consistent with platforms across the market and financial services businesses across the market,” Power says.

The group also felt the impact of allowing customers to transfer electronically from legacy products into Infinity (which has a Foxtel-style ‘pay for what you use’ pricing structure), without triggering capital gains tax or out-of-market time.

“That’s the right thing to do for customers and we’re responding to feedback from advisers and customers, so that has a financial impact while you’re trying to grow volume in the newer products,” Power says.

While pricing continues to remain front of mind for planners, Investment Trends’ senior analyst Recep Peker says it eased as an issue in 2012, with functionality coming to the fore.

“When asked to tell us what their most desired improvement from platforms are, in 2011, 19 per cent [of planners] said reduced fees, while 11 per cent said better reporting,” he explains.

However, in 2012, these numbers had changed significantly: better reporting became the most desired improvement, at 16 per cent, while fees were a close second at 15 per cent.

“This is partly driven by FOFA, and planners expecting platforms to provide them some support relating to better demonstrating value to clients,” Peker says.

But Wealthtrac’s managing director, Matt Johnson, says the real pressure on fees has come not from advisers or clients, but from the industry putting pressure on itself.

Wealthtrac also addressed the fee issue last year, moving its headline fee cap from $500,000 down to $350,000, while also raising the minimum investment from $25,000 to $75,000, which Johnson describes as “quite radical”.

“As a business, we’re going for a specific target market; in this industry you need a targeted approach rather than a scattergun approach,” he says.

“You can’t be all things to all people. By moving the minimum up to $75,000, we’re saying clients around $25,000 are maybe better off in an industry fund. With our self-managed super fund (SMSF) product, we believe our fees on that are very competitive, so we’ve lowered the barrier to entry for an SMSF.”

But the move wasn’t a result of pressure from Wealthtrac’s adviser clients, or from their clients. “The industry has put some self-pressure on,” says Johnson. “We’ve responded to that pressure; it’s about knowing your market and having that targeted approach.”

Brace yourselves for FOFA

FOFA changes are imminent and current data suggests planners are anything but ready for opt-in and fee disclosure requirements, while platform operators are still awaiting final guidance on grandfathering and conflicted remuneration.

A recent survey, conducted by planning software providers Midwinter, of 330 predominantly boutique and mid-tier group advisers, found that three months out from FOFA implementation, just one in five respondents has a technology-based way to address client opt-in.

Only one fifth were confident they understood fee disclosure requirements and less than half were confident they would be able to meet them, come the July 1 implementation date.

Chief executive of non-aligned platform provider OneVue, Connie McKeage, said it’s a case of trying to manage to the worst potential outcomes and working from there.

“We’re continuing to move because the thing we fear most is actually inaction,” McKeage tells ifa. “If we’re not doing anything and something has a timeframe to it, you don’t want to go to market with no solution at all.

“You’d much rather put something out there then get clarity and evolve it than not do anything. Luckily, we’re an organisation that adapts well to change – for organisations that are less flexible it must be increasingly difficult.”
However, businesses obviously don’t want to be spending time and effort on something that will never see the light of day.

“What you want to avoid doing is allocating money and resources to something that doesn’t come to fruition,” McKeage says.

“You see that a lot with all this discussion around superannuation changes, and you’re stuck – you look at probabilities for who will be in government and who won’t. Everything is about playing out scenarios and making the best call you can with some kind of theme around it.”

AMP’s director of platforms, Steve Burgess, says his group is dealing with regulatory change and building the functionality to deal with grandfathering as best it can, subject to final regulatory guidance.

“A lot of the work we’re doing is on SuperStream – the new rules around making sure there isn’t consolidation in superannuation across the industry. We have to build a lot of links with the government’s central hub on that function,” he says.

“We’re well advanced on what we can do but there’s still some uncertainty on how it will all pan out, how we can and can’t pay in terms of volume payments [but] we’re very confident we’ll be ready come July 1.”

BT’s Power says that with the Australian Securities and Investments Commission only releasing its draft conflicted remuneration guidance in March, the group is still working through those changes.

“We had to do a fair amount of work in the business around removing commissions because obviously they had to be removed before 1 July this year,” she says.

The group is also in the process of removing percentage-based shelf-space fees to dollar-based fees to comply with the changes.

“There will be a lot more discussion with our dealer group partners over the coming six months to work out how we move to the post-1 July 2014 regime [when full FOFA changes will have come into effect],” says Power.

“That will include the removing of commissions, removing the inbuilt platform payments, and looking at how we can help support them in transitioning.”

CFS recently announced that from July 1, the group’s platforms will feature a fast data download capability for fee information to help with FDS obligations.

Payment of conflicted remuneration has also been removed on FirstChoice Retail, meaning new clients are eligible for an automatic fee rebate from June 11, Colonial First State’s general manager of product and investments, Peter Chun, says.

The fee rebate is equivalent to the amount of commission that was previously payable.
Linda Elkins, Colonial First State’s executive general manager, told ifa the group’s largest platform, the First Choice

Wholesale platform (which currently has the most adviser support), is already in a FOFA-compliant model.

However, “there are other parts of the business where there will need to be change around how advisers charge for their business, but we also work with many advisers who are already in that model”, Elkins says.

According to Chun, the efficiency theme for platform providers revolves around how advice businesses need to lower their costs.

“The focus on platforms in generating efficiencies, whether it’s what we’ve done with model portfolios, the e-post capability we launched ... a lot of this capability is around lowering the cost to deliver advice. That remains core in a post-FOFA world,” he says.

“The other aspect is then how advisers can maintain or grow their revenue with some of the conflicted remuneration because some of that will disappear.”

An upgrading process

FOFA or otherwise, advances in technology, planner demand and a competitive environment all mean platform providers cannot sit on their heels when it comes to product development.

Matt Heine, executive director of independent platform provider netwealth, says the group’s accelerator range, launched in October 2012, is a wholesale-priced product released with an eye on FOFA’s push to fee for service and has commanded a majority of inflows since its release.

While most recent upgrades have been regulation-driven, from July 1 this year the focus will move towards implementing a direct equity offering, especially in international shares, and adding separately managed accounts (SMAs) to netwealth’s platform offerings.

Praemium recently added nine new model portfolios to the 100 existing models on the group’s SMA investment administration platform, Customised Portfolio Service, identifying stockbrokers as a key service provider looking to SMA platforms “to achieve broader distribution for their investment expertise”.
CFS in early May announced a range of enhancements to its FirstChoice and FirstWrap platforms aimed at improving adviser efficiency.

Colonial First State’s Peter Chun said the changes were based on adviser feedback and were done with an eye on upcoming FOFA reforms.

CFS announced a new corporate actions capability for FirstWrap that will allow advisers to automatically handle how clients respond to announcements such as rights issues or share buybacks, either selecting a default for all clients or customising each client individually. The group also announced a new online dashboard for the product.

AMP’s Burgess says AMP has been “on the front foot” in terms of expanding functionality, with development occurring on the group’s dedicated SMA platform Personalised Portfolio Service (PPS) and the continued migration of legacy clients over to the upgraded North platform.

The March release of the Investment Trends 2012 Platform Report found that spend on platform development actually dropped significantly in 2012, from $130 million in 2011 to $100 million. This was partly due to providers taking a ‘wait and see’ approach to rule changes before embarking on costly upgrades, according to Peker.

“With the [FOFA] requirements becoming clearer, platforms’ focus is turning to improving planners’ business efficiency and helping them add demonstrable value to their clients,” he adds.

“Platforms are well positioned for a busy 2013, with many reporting significant development schedules for the year ahead.”

Developments in 2012 focused on improvements to help with client review reporting and transactions, according to Peker.

Some of the tools added by providers last year include a greater range of reports and greater depth of detail within these reports; increased transparency and flexibility around fee reporting; more efficient reporting (including bulk reporting); and pre-scheduling of reports to run on a periodic basis.

On or off platform?

Whether platforms effectively offer the variety of assets that advisers and investors are after has been a ‘hot topic’ for some time, with suggestions that planners may be forced to look at off-platform investing for certain assets.

This was seen coming out of the GFC, when market volatility resulted in a huge push into cash and term deposit products, with platforms quickly adding a range of such products to stop a flow of funds heading off platform.

More recently, there has been increased interest in directly held investments such as direct shares, exchange traded funds and SMAs. While some platforms cater to these already, it is a patchy area compared to the traditional strength of platforms, the managed funds.

Scott Durbin, general manager of strategy at CFS, says his group has not seen a significant move on or off platform recently, pointing to Investment Trends data that shows planner platform usage has stabilised at about 72 per cent.

Earlier this year, the group commissioned research from Praxis Partners comparing the benefits of operating on versus off-platform, looking at two practices, and finding that “for most planning businesses and their clients, on-platform was the best option”.

Moving off-platform shifts the costs from the platform administration fee into the adviser’s office, resulting in costs up to four times as high. It also results in the principals of the advice business shifting their focus from client servicing and business development activities to administration and operations-type activities, to the detriment of the business, according to Durbin.

“What’s right for the client is key in this, so it comes back to the breadth of offerings available on-platform now. In platforms now there is broad choice available so for a majority of clients, their needs can be met on-platform,” Durbin says.

“Examples of that would be deposit products, fixed interest products, equities and managed funds.”

Direct equities handling on custodial platforms has been a focus area for many of the wraps over the past few years, so the functionality is considerably richer than it would have been three years ago, he adds.

Heine, meanwhile, says ETFs are an “interesting space”, given the focus on fees both of advisers and clients.

“They’ve become more important in a client’s portfolio, especially where they’re looking to outsource the beta of the portfolio,” he says.

Netwealth, Heine adds, is seeing a significant uptake of ETFs and last year put some effort into making sure ETFs traded on the platform were affected directly.

Costs are coming down on-platform for direct equities as well, especially for larger accounts with fee caps, where it is increasingly making sense to have the whole portfolio on the platform rather than just the managed funds and other platform assets, he says.

The SMSF conundrum

SMSFs will continue to present a challenge to technology providers, given their different administration requirements and various investment patterns.

Wealthtrac launched a dedicated SMSF solution in April and Johnson says there are opportunities there for advisers to become more efficient by effectively outsourcing their SMSF administration.

“[Advisers] have to align their businesses with the new paradigm, but they also need the tools to be able to,” he says,

“so we’re looking to partner with advisers who are already using our platform and provide them with the necessary tools to get into the SMSF space without cannibalising our business model.”

Darren Speirs, head of portfolio solutions at Bravura Solutions (which provides SMSF solution Garridin), says there is an opportunity for technology providers to provide more than just a book of records.

“Suburban accountants will be hanging on to the bulk of the [SMSF] business but a lot of it will go to administrators,” he says. “They’re going to want to add much more value, that whole non-custodial administration service that’s starting to develop.

“It requires technology, data feeds – a broad range of asset coverage.”
According to Speirs, SMSFs are actually simple to administer due to a predominance of managed funds, but it is not done via a custodial arrangement because the trustee has full control of the assets.

“If you bring them on as a client, you can’t guarantee they won’t go out and buy a property … There’s a range of things you can bring on to an SMSF fund that most of these books of records systems can’t handle,” he says.

Lane says many Count Financial members are accountants who are not advisers, but still do a lot of SMSF work – and they are showing significant demand for listed securities to service those SMSF clients. This led the group to implement a listed securities offer directed at accountant members.

“Those clients often require listed securities off-platform and this [offer] will give them an ability to provide them with that in their listed tools, so they’re very excited about that,” he says.

BT’s Power also sees opportunities in the SMSF sector for platform providers: “It’s a really growing segment of the market, but it’s all about how you offer services that fit that market,” she says.

“A lot of our investment wrap client base are currently SMSF [clients]; we’re doing lots of custodial and administration for those clients.

“The next step is how do we offer more value in terms of SMSFs – establishment service, better reporting on the cash accounts so the accountants can produce the tax return, better tools, and better education.”

It is hard for a platform provider to administer those direct, unlisted holdings such as direct property that need to be independently valued, but it can still add value through supporting the establishment and administration of funds, she says.

“It’s more about the reporting services [because] you can’t hold them in custody – we have plans to consolidate the reporting and provide reporting for them, but we’re not taking on custodial holding of those assets,” she says. «