The benefits and challenges of taking investors off-platform
Several years ago, Andrew Jones from Eureka Financial Group moved some clients off-platform. He now shares his experience and the reasons why his practice decided to return.
In 2006, we decided to move around 50 of our clients off-platform. As a practice, we found ourselves moving away from using solely managed investments for client portfolios.
We wanted more flexibility with a choice between term deposits, Australian Securities Exchange (ASX)-listed investments and managed funds, and with many of our clients also moving into pension phase, we knew our existing master trust platform did not cater for this.
So the thinking was an off-platform solution catering for a more unrestricted investment strategy would see a better outcome longer term.
We also saw how confused many of them became when they saw their fund values falling, yet continued to receive high levels of realised capital gains as income.
This was especially the case in the early days of the global financial crisis, and so our move off-platform was in response to what our clients wanted, which was more certainty around income levels.
The benefits off-platform
Using our new system, we were able to generate a fantastic one-page portfolio summary. This proved to be a success with our clients and helped us when doing reporting and undertaking client reviews.
Our clients really liked having direct ownership of their assets, as it gave them a sense of feeling more in control of their portfolio.
From a business perspective, it was great to be able to integrate our company’s cash management account into our new system, as it meant we could bill our clients in a way that best suited us.
The challenges off-platform
On the downside, as a business we really underestimated just how much administration we had to do to look after our clients’ portfolios, as we’d now become the administrator and mail house for almost everything.
Looking after clients with just portfolios of ASX-listed equities was pretty easy.
What we didn’t realise was just how much work goes on behind-the-scenes at the platform level: when administering managed investment schemes; direct fixed interest investments; international shares and the challenge of domestic equities.
This was especially the case with corporate actions - just how technical and time consuming some of these were really opened our eyes to how valuable (and how undervalued by many) the custody aspect of a platform is for advice businesses.
And then, while our clients welcomed our new one-page portfolio summaries, not having a good quality attribution system supporting them proved a huge headache for us.
It was incredibly frustrating not being able to accurately show our clients how each asset class within their portfolio was performing.
We ended up having to build and compile our own reports from scratch, which chewed up more time and added another layer of cost to our business.
The conclusion we came to was that if our clients’ portfolios were only made up of ASX-listed securities, term deposits and cash, then using an off-platform solution would’ve been viable for us.
But with so much of our clients’ portfolios invested outside of these asset groups (international equity and fixed interest), we soon realised that being off-platform simply wasn’t going to work for our practice.
So, in 2010, we cut our losses and began the long process of transitioning these clients back onto a platform.
What we learned
Before you consider moving your practice off-platform, there are two things that you need to really think hard about: cost and time.
From a cost perspective, you need to determine:
- What would be the ‘true cost’ of this transition to my business?
- Would my business have the scale to make this new business model profitable?
- Given where we are as a business, could we really afford this cost-allocation right now?
- And then from a time perspective, you should also ask yourself:
- Who within my business would have the capacity and skills to lead this transition?
- Would we have enough time to continue servicing our existing clients and attract new ones, while this project is underway?
- Given where we are as a business, could we really afford this time-allocation right now?
For us, moving our clients off-platform cost far more and took much longer than we ever expected.
Based on our outlay cost plus the expected ongoings, we would’ve needed to generate additional income of two to three times this amount just to make it viable, and we simply didn’t have the scale to achieve that.
Returning to platforms
The whole process of moving these 50 clients off-platform and then back onto a platform has taken us almost three years of fitting migration activities with day-to-day new business activities. We are currently migrating the last client onto our chosen platform, Colonial First State First Wrap.
As a practice, we’ve certainly learned a great deal. When we began the off-platform service we had a view that Wrap accounts were too expensive and another layer of complexity of which the client could do without.
The reality was we under-estimated the amount of administration effort required in-house, and we stopped being forward-looking advisers to clients and became rear-view-mirrored administrators.
Now we see the scalability model of using an investor-directed portfolio services (IDPS) tool and the efficiency of moving away from a one-to-one execution service to a one-to-many.
From a business perspective we acknowledge that you can’t have it both ways. If you want scalability, you need to find outsourced partners who have the bigger pool of resources that can deliver something smaller businesses cannot.
So we agreed to surrender part of our fees that represented investment administration back to the platform provider. In reality this meant some clients paid less and some a little more but with an improved level of efficiency.
A lot of advisers will focus on revenue, including accountants. We took a more holistic view of the client book and the return we were making on it.
Since moving back to a platform our focus has moved to end-to-end processing, particularly for our SMSF clients.
Under our off-platform model we found the data feed process into accounting software was clunky and too manually intensive. It’s now vastly improved and as a result SMSF pension clients are receiving their tax refunds in November not May or June.
As a business, we certainly now know what we’ll be focusing on, and what to leave to the experts.
Note: To help understand the issues and costs associated with moving off-platform, Colonial First State recently commissioned Praxis Partners to find out directly from advisers what’s really involved in making this transition.
Andrew Jones is a specialist adviser with Eureka Financial Group, an authorised representative of Financial Wisdom.
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