FOFA fatigue sets in for investment platforms

Investment platforms are facing pressure from all sides, Milana Pokrajac writes. How will they deal with changing financial adviser demands, low investor sentiment and fast approaching regulatory deadlines?

There is so much to do and so little time to do it.

With fast approaching regulatory deadlines and shifting investor/financial adviser demands, these are definitely challenging times for investment platforms.

Big or small, institutionally owned or not, the impact of continuing market volatility, plummeting investor sentiment, proposed changes and the increasing focus on cost will be significant. 

The pressure is mounting from several sides and platform executives are seeing both challenges and opportunities pop up before their eyes. But just how will they cope with numerous changes? 

Land-grab game 

As of 1 July 2012, all volume rebates passed down from investment platforms to dealer groups will be banned.

Despite industry-wide support for this proposal, institutions and platform providers now have to secure their distribution networks.

Although the AMP/AXA merger might have started the latest round of consolidation, we have recently seen IOOF’s acquisition of DKN and Commonwealth Bank of Australia’s proposed  purchase of Count Financial not long after that. 

But for Connie McKeage, chief executive officer of platform provider OneVue, the ever-growing market consolidation presents a major challenge. 

“We need the support of either institutionally owned planning groups who have some independence left or the independent financial planning sector,” McKeage said, adding OneVue does not own product distribution channels.

“When institutions buy up dealer groups they are buying up our distribution because we don’t own it the same way that the large firms do.” 

However, some non-institutionally owned platform providers decided it would be best to make a move. Just over two weeks ago, netwealth announced the purchase of Paragem Dealer Services, while HUB24 added seven more dealer groups to its client list. 

“We are not in a position, nor are we keen, to buy a large dealer group, so we’ve been looking at different ways to make sure we can increase our footprint,” netwealth managing director Matt Heine said.

“Through the purchase of Paragem [Dealer Services] we get access to a huge network of independent financial planners, which is a part of the market that we work very closely with.” 

There is one major player, however, which hasn’t made a move yet, and that’s BT Financial Group. Apart from Westpac Financial Planning, Securitor and Magnitude (which are owned by the banking group), DKN was a big supporter of BT Wrap prior to its acquisition by IOOF. 

“We are closely watching the consolidation in distribution at the moment,” said BT’s head of platforms, Chris Freeman. 

Freeman said the BT strategy before it was bought out by Westpac was to build the best product and service, regardless of who owned the distribution channel.

“There is still an element of truth in that, and if you continue to invest in the platform and have the most functionality at the right price, people will still use you, because they otherwise have to build their own – and we all know how expensive that is,” he said.

BT Wrap and SuperWrap have generated by far the biggest inflows over the year to June 2011 and have the largest amount in funds under management.

However, the company was quick to snatch DKN’s former chief, Phil Butterworth, following the buyout of the dealer group. 

Shifting market - shifting offerings 

Securing continued support for products by way of acquisition alone will not cut it in today’s market environment.

Platform providers are realising that investors’ thirst for cash and defensive assets is not just a quick fad resulting from the financial crisis, and many are moving to introduce more attractive offerings than those of managed funds. Term deposits, in particular, are proving to be a hit. 

Just under a year ago, ANZ-owned OneAnswer platform introduced six new ANZ term deposits which have generated more than half a billion dollars in inflows, while BT has had $3 billion in term deposit inflows on its platform since 2009. Colonial First State (CFS), too, is currently promoting its FirstRate Investment Deposit on FirstChoice. 

“Given the demand for safer, more secure investment options and basic, simple to understand products, we’ve been developing income generating solutions,” said CFS general manager for product and channel development, Peter Chun.

While cash-style products are important, investment platforms also need to accommodate other shifts in the market, such as the increased use of exchange traded funds (ETFs) and separately managed accounts (SMAs).

HUB24 chief executive officer Darren Pettiona said investment platforms will start to include a lot more of direct investment options. “What was the big traditional fund manager and management expense ratio model will start to disappear in some shape or form,” he said.

“We’ll see a lot more things like bonds, partial bonds, fixed income instruments, direct equities, ETFs, SMAs, and a lot more cash.”

In April this year, AXA rolled out a two-tiered approach to pricing – a lower, discounted rate for certain investments and a full rate for others, Burgess said.

“Platforms have a huge role to play in helping financial advisers demonstrate the value of their financial advice when they come to implement their advice through a platform – being able to be confident about what they’re putting in place and being able to show it to the client either on the screen or through a printout actually really does underpin and support the whole approach to the client,” he said.

“We also know that pricing is raising its head again, and a number of competitors out there are putting competitive offers out on the table,” said AMP/AXA head of platforms, Steve Burgess.

For MLC, though, the platform market is falling into two distinct categories: investment solutions needed for the majority of investors and the platform needs of a high net worth (HNW) client base.

“In HNW we continue to see the trend towards self-managed super funds, direct shares, greater control and flexibility in investment offerings and investment choice,” said Michael Clancy, executive general manager of investment platforms for MLC and NAB Wealth. 

MLC Wrap, he said, was specifically designed for that market, while MasterKey Fundamentals caters for the masses.

“We are doing a significant relaunch in the next few weeks; in that market space we see investors are looking for … more absolute return options, with markets being as volatile as they have been,” Clancy said. 

ASX AQUA - opportunity or threat? 

Competition in the platform space is fierce, and isn’t coming just from within the sector. The Australian Securities Exchange (ASX) hopes to launch the second part of its AQUA project in April 2012, which will allow the listing of managed funds and structured products, and provide electronic settlement services through its Clearing House Electronic Subregister System (CHESS).

“It’s about encouraging managed funds to quote their prices on the ASX, so we can introduce the efficiency of CHESS,” said Richard Murphy, general manager of equity markets at the ASX.

“As you know, applications and redemptions at the moment are 100 per cent paper-based, fax-based, with cheques flying around Australia.”

However, the ability of investing in managed funds on the ASX will put pressure on investment platforms, according to former chief executive officer of platform provider Praemium, Arthur Naoumidis.

“The platforms are owned by the big banks who own fund managers – from what I hear, there is a lot of resistance from the big names,” Naoumidis said.

“Independent fund managers are happy to play, because all of a sudden they’re not tied to a platform, there are no shelf fees and they can be traded on the ASX.”

While some see it as a threat, Murphy said AQUA would provide opportunity for investment platforms in terms of adopting the CHESS system and dumping physical paperwork.

Colonial First State and AMP stated they had been discussing the new AQUA framework with the ASX for some time, and considering potential opportunities for the funds management side of the business.

“We see it as an alternative channel – it is going to be very attractive for stock brokers and their clients to be able to access managed funds via the ASX,” said Peter Chun, adding that investment platforms have primarily been supported by financial planners, who will continue to use them.

A platform is about wrapping administration and reporting functions around wholesale investments – a service AQUA does not offer, according to Burgess.

“I could definitely see a continued role for the administration hub that is the wrap platform to perform for financial advisers and clients,” Burgess said.

FOFA fatigue 

Just like every sector in the financial services industry which will be affected by the proposed Future of Financial Advice (FOFA) reforms, platform providers have also been working on the new requirements for more than two years.

Volume-based payments to dealer groups will be banned, and so will volume-based shelf space fees coming from fund managers; there are compliance requirements to be implemented, as well as the opt-in solution to cater for financial planners.

Many investment platforms have already developed different contingencies to implement (depending on where FOFA lands), but they cannot quite get on with the changes.

“We also operate in the MySuper space,” said Peter Chun. “Given the staggered start date (1 July 2012 for FOFA and 1 July 2013 for MySuper), it’s actually incredibly impractical having two sets of changes being forced upon existing clients.” 

CFS has been involved in lobbying the Government both directly and through industry associations to extend some aspects of FOFA to coincide with the MySuper deadline.

“If there is just one start date it would be very beneficial and [there would be] a friendlier customer outcome, as we won’t have to put them through two sets of changes,” Chun said. 

ANZ Wealth’s head of OneAnswer and employer superannuation Mark Pankhurst agrees. “We are talking about very big, complicated and complex registry systems,” he said.

“We could meet the deadline, but I believe that without clarity and without legislation in place, that creates challenges and could mean that you could spend far more money, time and effort building things you might not actually use if legislation changes.

“We would prefer to see an extension, and we would like to see a situation where an implementation date could be 2012, but ultimately we would like an opportunity to actually implement over another year,” Pankhurst added.

Opt-in deadline stress 

There is definitely a ‘wait and see’ approach being adopted by investment platforms, especially with respect to the development of an opt-in solution for financial planners.

At a recent roundtable conducted by Money Management, CFS general manager for strategy Nicolette Rubinsztein said Colonial would adopt a two-stage approach to future platform development. 

The ability to capture the client information and the fee information, she said, would be developed in the first instance, while the next build – which only needs to happen in two years time – will be developed afterwards. 

The Government hasn’t provided much certainty as to how grandfathering will work, and many claim there is just not enough time to make significant changes by the time opt-in is implemented in July next year. There are many questions regarding opt-in yet to be answered. 

“Even things like if [the clients] don’t opt in within a specified period of time, you’ve got to be able to turn off the revenue for the financial adviser; but if you turn it off and the client comes back and says ‘I didn’t mean to do that’, can you or can you not then go back and pay retrospectively to the adviser?” OneVue’s Connie McKeage pointed out. 

However, there is another, very obvious issue. Many clients have assets on multiple investment platforms, which makes it difficult for a single provider to collect all of the information and manage the whole process.

OneVue has acknowledged this issue, and is looking to set up a stand-alone opt-in solution which is not limited to just the OneVue platform. 

“By the time everybody sends through their reports, clients will be inundated with information, and they’re going to be very confused unless there is a standard format in the industry,” McKeage said.

“It’s a very complex scenario to try and implement in this market, with such ambiguity remaining and with the clock ticking,” she added. 

But whether investment platforms can come up with a common approach to opt-in is yet to be seen.

Over the past few years, there has been a rationalisation of the number of investment platforms planners use for their clients, and according to Matt Heine of netwealth, financial planners will have to pick a primary platform and potentially use it as a method to scrape their fees.

“People are making sure that their back office is as tidy as possible, and FOFA is going to continue to drive that back office efficiency requirement,” Heine said.

Some, however, have acknowledged that the real opt-in solution might sit at the financial adviser technology level with some of the financial planning software providers.

Have conflicts been removed?

Removing conflicted remuneration models across the industry is one of the most supported FOFA proposals. As of 

1 July 2012, payments based on volume that are paid from the fund manager to the platform provider and from the platform provider to the licensee will no longer be permitted.

But it seems most investment platforms have been ready for this change for some time now.

Many providers, such as AMP, HUB24 and OneVue do not charge shelf space fees at all, but rather charge dealer groups a flat-dollar administration fee.

Others, like BT, do charge shelf-space fees, but Chris Freeman says the volume-based component is gone.

“The total fund manager payment amounts to 2 per cent of our total revenue,” he said. “What it means for us is that it’s an administration clawback rather than a profit driver.”

Preferred partner programs are part of some providers’ remuneration models, too. As part of some deals, fund managers pay additional fees to platform providers that buy them greater access to financial advisers via additional marketing and distribution opportunities.

BT Advantage and Asgard Preferred Partners programs involve such deals, while AMP and netwealth also run similar programs.

AMP charges a voluntary additional fee, whereas netwealth selects fund managers for its preferred partner program based on ratings, and passes on the discount to the end client.

Nevertheless, some industry participants see this service as a clear conflict.

“Paying extra so you get access to your financial advisers is really conflicted; charging [fund managers] fees is double-dipping – it’s platforms using their muscle to control distribution,” said HUB24’s Darren Pettiona.

However, in an interview conducted by Money Management in December 2010, Treasury’s general manager for the corporations and financial services division, Geoff Miller, said eliminating payments with the potential to create conflicted financial advice was the focus of proposed FOFA reforms — and that preferential deals between investment platforms and fund managers weren’t causing much concern.

“They are getting so far removed from the financial advice that’s actually given to the client that we feel less [worried] with that type of payment,” Miller said.

Treasury is more concerned with stopping conflicted remuneration methods between investment platforms and dealer groups, and dealer groups and financial advisers, with further steps to be decided upon consequently.

A tale of two platforms

Any debate about conflicts of interest leads to a debate about vertical models and consolidation in the financial services industry.

This consolidation was initially driven by the global financial crisis, and then (as some would argue) by the proposed FOFA reforms (see Figure 3).

Do investment platforms provide a product agnostic service or are they products themselves?

For some, it’s whether a platform is owned by a product manufacturer. Smaller players have been particularly vocal on this issue.

“The reason we are not a product is because we don’t own any of the products on the platform,” said OneVue’s Connie McKeage. 

“I still think institutionally owned platforms are a service, but there needs to be a clear delineation between the service elements of it and the product elements of it,” she said.

“Maybe it’s time to disaggregate platforms from financial advice, and from other services.”

For others, it’s about managing conflicts of interest. In the eyes of the law, investment platforms are a product. “But there is no doubt in my mind that we are an administration service,” said Chris Freeman.

Investment platforms provide administration, tax reporting and electronic execution for all products, amongst other services. But in terms of product neutrality – apart from non-aligned platforms with open models – institutionally-owned providers also claim they are product agnostic.

“We have over 850 different managed funds offerings on our wrap platform,” said Freeman.

“The proportion of managed funds that are on the BT Wrap in total, in terms of dollars, is less than 10 per cent – there is no bias, platforms have to stand on their own.”

Colonial’s FirstChoice also lists funds from close institutional competitors such as BT, Macquarie, AMP and ING, amongst others.

Peter Chun added that Count’s APL model would remain the same.

“We don’t think there’ll be any changes to their model, they will still have an open APL as all our dealer groups do – Financial Wisdom has eight platforms on their APL,” he added.

But whether the current market is a tale of two types of investment platforms is not a question of high priority for many players in the sector.

Although most have acknowledged the next 12 months and the implementation of FOFA will be challenging, they are looking forward to the next period.

FOFA, and the increasing focus on cost, will give rise to cheaper platform solutions in the new year for some, while others will look forward to introducing modern IT systems and ridding themselves of the legacy burden.