All eyes on Aqua II
As the Australian Securities Exchange is about to launch Aqua II, Lucinda Beaman looks at possible outcomes for the new capability. Will it succeed or is it bound to fail like its predecessor?
The Australian Securities Exchange (ASX) is just months away from launching its listed managed funds capability on Aqua II – a service that, if supported, could see the end of the antiquated and expensive paper-based application and redemption for managed funds.
Richard Murphy, ASX general manager, capital markets told Money Management that so far, Aqua had succeeded in signing up more than 30 members, consisting of fund managers, unit registries and stockbrokers – a figure he said far exceeded initial expectations.
Murphy said that group included “a good number of fund managers and the right number of unit registries to be able to service them,” with the remainder made up of ASX brokers. Murphy said the ASX would not name its foundation members until it had closed some outstanding key discussions.
While previous attempts to resolve the issue of paper-based managed funds processing have failed, conditions are now leaning in favour of the eventual success of Aqua II.
In a recent white paper on the topic, the consulting group Tria Investment Partners said there was “no question that the external environment is now much more favourable than prevailed during the previous attempts”.
The group did add, however, that some “large established players have a lot to lose from Aqua II success and it cannot be assumed they will engage or cooperate – let alone be supportive.”
Tria Investment Partners believes Aqua II “casts the ASX as a competitor to traditional platforms and is an additional enabler of the already burgeoning off-platform model”.
“We expect there will be some reluctance from bank owned brokers and platforms to get behind Aqua II, given the threat to existing profitable business models,” the paper states.
Murphy said his team has had “in-depth, multiple discussions with every one of the big bank-owned fund managers, and the platform guys and distributors within the banks”.
“Nobody in the industry denies the central logic of what ASX is doing,” Murphy said.
Murphy said from the discussions it was clear that platforms and bank-owned product manufacturers “do see some benefit to their business” of being able to leverage the ASX’s Clearing House Electronic Subregister System (CHESS) for managed funds.
“Every one of the platforms is also a member of CHESS for equities. Platforms have equities on them as well, but they don’t have 2,000 people stuffing envelopes in Adelaide in relation to equities,” Murphy said.
“From that perspective, they’re looking at it as a [potential] benefit. What it does to the rest of their business, whether they see it as a threat to shelf space fees for managed funds versus a friend in processing – that’s for them to make that call.”
Colonial First State and AMP have previously stated they are discussing Aqua with the ASX and considering potential opportunities for the funds management side of their businesses.
The ASX does not see itself as a competitor to platforms, Murphy said.
“We’re not doing tax reporting or anything like that; we won’t do what others do because we actually think in the end some platforms will start using this to get some of the benefits, and they’ll still provide tax reporting.”
Opportunities
There appears to be a compelling argument for platforms to join the service.
Murphy said Aqua would charge between $3 and $5 per transaction, while “nearly all the fund managers” quoted him anywhere between $30 and $150 per transaction costs for managed fund applications and redemptions.
The $3-5 charge represents the CHESS cost, and is not inclusive of unit registry costs, Murphy said, and while Aqua can’t promise to redeem “your entire $150”, it can cut “a big chunk” out of paper-based transaction costs.
“The other thing that we think will benefit advisers’ clients is that by removing some of the costs in the process, the MERs of funds on ASX will end up being lower than the unlisted versions.”
Bryn Nicholson, chief operating officer of Yellow Brick Road, agreed that Aqua would “force down some of the fee structures in managed funds and lead the world of managed funds and ETFs to converge – and we think that will be a fantastic way to provide a better deal for clients.”
Nicholson said Aqua would mean “some of the entrenched interests that have been keeping the cost structure of access to managed funds high will be undermined,” forcing down the share of revenue that goes to fund managers and platforms as they lose some of their grip over the assets.
Murphy said the system would also provide administration efficiencies for financial planners, allowing investments in managed funds, direct equities, REITs, infrastructure funds and ETFs to be included on the same holding statement.
“For a client who wants to buy BHP and a managed fund, I can send the same orders through the broker I use and I know the same process will occur and my client will be better off as a result,” Murphy said.
Tria Investment Partners believes some ‘sophisticated’ financial planners and higher end advice segments are now “substituting traditional platforms with technology via CRM and administration software, such as Xplan, Coin and Praemium”.
While these technologies are “well short of perfect”, the group says the “removal of platform costs creates scope for a big headline reduction in fees to the client”.
While removing a platform means adding the cost of additional administration and planner desktop software costs to the practice, Tria believes combining Aqua with some of the now quite sophisticated CRM systems available could prove effective in cutting costs.
The march of progress
Connie McKeage – now chief executive of OneVue – was acting chief executive of e-Trade when it was set up in Australia.
“It was tough at the time because it was the disaggregation of the value chain in broking, and all of a sudden we had research basically separated from execution. Everybody said ‘it’s not going to work’, but look at it now. It’s a no-brainer and everybody just accepts discount broking,” McKeage said.
She believes Aqua II will similarly challenge the traditional order of the platform world.
“I think it will take longer to take off than people think, but I don’t think it will fail this time. I think it will, inevitably, be a success.”
Tony Fenning, managing director of Shadforth Financial Group said “any technology improvement that comes along to improve the service to clients or lower the cost is a good thing”.
The ASX is progressing towards a mid-year launch, subject to ASIC regulatory clearance, Murphy said. In the meantime, the platforms are “all looking at each other to see is anybody going to take it up”.
“It’s really up to them to make an assessment of what they think is going to happen with FOFA coming in, the clear government intent for this space, straight through processing being a clear efficiency compared to what’s going on at the moment and the benefit they would achieve in their own cost structures.
“For some, it’s just an element of plumbing, but it is a piece of the plumbing that is absolutely rotten to the core. And nobody would argue with that,” Murphy said.
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