Are Cerulli's predictions for master trust and wrap account providers coming to pass?
Cerulli predicted that only five master trust and wrap account providers would survive a round of price wars and industry consolidation by 2004. Is it possible they got the numbers right but the dates wrong?
Responses at the time of the report’s release were generally negative, but is it possible Cerulli Associates got the numbers right but the dates wrong?
For the platform space, Cerulli predicted that only five master trust and wrap account providers would survive a round of price wars and industry consolidation by 2004.
It was a bold prediction in the year 2000 given that the platform market had not yet grown to its full capacity, but it appears Cerulli did indeed predict the future.
The fact that it would take 2.5 times as long to occur and would be driven by the banks was something that was not in the original forecasts.
However, Cerulli did revise its predictions in 2003 and added the caveat that while there might be more than five or six platform providers in the market in the future, only a few were likely to be truly profitable.
In other ways, Cerulli picked the trends that would shape the industry, claiming consolidation would take place due to a push for simplified managed fund administrative systems and the increasing inability of distribution platforms to differentiate themselves from one another.
At the same time, the growth of low-cost wrap products would also spur on the industry, a prediction borne out with the release of FirstChoice and its competitors in the first half of this past decade.
Cerulli also predicted that master funds and wrap accounts would become the dominant vehicles through which investments would be made.
At the time of the prediction, just over a third of retail investments were made through platforms, today that figure is nearly three-quarters (Table 5).
Cerulli also predicted the rise of the independent financial planner, however, that had been on the cards in the Australian market for many years.
Yet Cerulli stated this would take place at the expense of the larger licensees. This prediction did not factor in and could not know about the growth in demand for advisers at both ends of the spectrum.
Nor did it account for the increased level of compliance that would be placed on advisers, causing many to stay within larger institutionally-owned groups to be able to afford this extra business burden.
However, Cerulli did predict the eventual demise of up-front and trail commissions and the rise of fees based on a client’s funds under administration. The next step of fee-for-service was not mentioned at all.
Yet with the 20-20 vision of hindsight it is easy to see where the Cerulli Report was too eager, and one of those predictions was the growth of funds under management over the decade from 2000.
According to Cerulli, the markets would grow at around 20 per cent per annum and funds under management would pass the $600 billion mark in 2004.
History shows that was not to be the case, with returns averaging out at 9.26 per cent per annum (Table 4) but going through a purple patch from 2003 to 2007, where two years — 2004 and 2006 — nearly reached the magical 20 per cent mark.
Sadly, 2008 is remembered for passing that mark, but on the negative side of the ledger.
On the other hand, ignoring 2002 and 2008 shows funds under management growth averaged at 14.6 per cent, which is edging closer to that prediction of a decade ago.
Interestingly, local research house Dexx&r has also released data on the growth of the market and projected it to increase by an annual average of 8.7 per cent per annum for the next 10 years.
By that stage it predicts that total funds under management will be more than $2.7 billion.
Currently, total funds under management stands at $512.7 million.
Did the Cerulli Report tell us anything we didn’t already know at the time?
After 10 years it is hard to tell given the changing nature of financial services and the inexact nature of market-based predictions.
Nonetheless, it would have been interesting to see what would have happened if all the predictions came true.
The local scene would be much different if it had sustained 20 per cent growth per annum for a decade and the platform market had been whittled back to five major players in 2004, which, oddly enough, is the last time Cerulli spoke about the Australian market.
AUTHOR
Jason Spits
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