End of the line?

The platform industry has not been shielded from the turmoil of the financial crisis.

All platform operators have suffered falls in funds under administration (FUA) which have hit their bottom lines.

br> According to the latest Morningstar figures on the sector, FUA for platforms was at $419.7 billion at December 2007, now regarded as the peak of the last economic boom.

This had fallen to $362.4 billion by September last year and was down to $317.5 billion at the end of December 2008.

In 12 months more than $100 billion has been wiped out due to falling valuations on assets and withdrawals.

Fund inflows to platforms were at $1.4 billion during the last December quarter, according to Morningstar, compared to $4.5 billion in the previous December quarter.

Platforms, because of their dominant position in the retail advice industry, have become a barometer of what is happening with investors.

The results have also become a very public illustration that platform operators are not making money in this current crisis.

The platforms have always taken a cut of the FUA and inflows to a fund manager while also charging investors as the money passes through.

Under pressure

With smaller amounts of money passing through and falling fund manager assets, platforms are being squeezed.

The head of Macquarie Wrap, Doug Chang, said platforms certainly have been affected by the global financial crisis.

“Market movement has obviously affected us and has only been partially offset by the significant inflows of $3.6 billion last year and transfer fees,” he said.

“We are also still finding opportunities to bring new clients on board and client numbers are up by about 4 per cent.”

Work on improving the platform’s offering to advisers has been crucial in retaining market share, head of BT Wrap Chris Freeman said.

“We saw an opportunity to grow market share by expanding the product offerings while improving our operating efficiencies,” he said.

“Fund inflows have been hit but we are not talking in the negative.”

Freeman said BT looked at platform operations last September and saw there could be some savings.

This involved letting some people go and a concentrated effort on reducing expenses.

“Every part of the business was reviewed,” he said.

“But while times are tough, we are still making money.”

Colonial First State general manager, strategy, Nicolette Rubinsztein said platform revenues had plummeted, but costs had stayed the same.

“Anything that was marginally profitable (on the platform) before has now gone into the negative,” she said.

“We are cutting costs and slashing discretionary spending significantly.”

Rubinsztein said the platform operator was also looking at innovative ways to cut costs, such as staff taking leave or working nine-day fortnights.

“We are also reviewing projects that were being looked at for the platforms,” she said.

“It is important to keep the culture of a platform together in these times and maintain staff satisfaction, as this can impact on service levels to advisers.”

Service levels

While fees have been squeezed, platform operators admit they still have to offer the same levels of service to dealer groups and advisers.

For platform operators such as AMP, the thought of dropping levels of service has not even been discussed.

“The key to surviving this downturn is making sure nothing changes,” said AMP director of personal wealth management Andrew Hobern.

Revenues are down, but there is still good cash flow coming (into the platform).”

However, it is important for the operator to maintain operating efficiencies when revenues have fallen.

No platform operator wants to cut back their level of service, especially to financial planners.

“You are always striving to achieve the maximum efficiency to remain viable throughout the duration of the current downturn,” he said.

The danger of cutting back on services to planners during the downturn is they won’t support the operator in the good times.

“In these times it is even more important to maintain your service levels,” Hobern said.

“We have seen an increase in calls and it is important we reassure clients and advisers,” he said.

Aviva Group general manager, marketing, Tim Cobb said while the company was cutting the cost of running the platform, the focus was still on providing good service to its users.

“We are cutting costs in areas such as marketing spend and travel,” he said, “but the focus is not on the things that make a difference for our customers.”

As a result, the company is still spending money on developing the service side of its platform operations.

“We are still investing in areas such as voice recognition, so when a client rings the call centre it will recognise that person, which again is delivering efficiencies,” Cobb said.

“We have to carry on spending to achieve efficiencies.

“What we can’t do is cut spending on the wrong things and then expect the platform to be successful when the upturn comes.”

MLC Platforms general manager Anthony Waldron also said there were no plans to cut spending on service levels in the current downturn.

However, this has not stopped the platform operator from seeking efficiencies to improve the bottom line.

“We have efficiency programs running across the entire platform and that puts us in a good position in these times,” he said.

“This has been going on for the past few years.”

Achieving efficiencies and running the platform is not cheap, as the technology needs constant updating.

Aviva estimates platform operators need to spend about $30 million a year to maintain the technology driving systems’

Cobb said in Aviva’s case, it was spending an additional $10 million to add separately-managed accounts (SMAs) to the platform this year.

He said the relationship between the platform and the adviser was very important, and when a lot of funds became illiquid, advisers appreciated the moves made by the platform to support customers.

“I cannot think of any thing worse than not supporting the adviser during these times,” he said.

“People really respect you when you support them in tough times.”

Chang said despite expectations the platform business would suffer a 10 per cent decline in profits this year, Macquarie is still committed to spending money on achieving further efficiencies in the operation of its platforms.

“We continue to improve efficiency and use of automation,” he said.

Smaller operators

The cost of maintaining the technology needed to run the platform is putting pressure on smaller operators.

A few years ago it was widely believed that any platform with less than $10 billion of FUA was not making money.

In the current economic climate, FUA would have fallen dramatically, raising questions about the viability of some of these operators.

Freeman said BT was being approached by dealer groups that were worried about the operation of the smaller platforms they were using.

“By dropping service levels, the smaller operators are playing into the hands of the big group players [of platforms].”

Freeman said BT spends $31 million a year on information technology, excluding additional spending on adding new services and products.

But that doesn’t mean every product on the platform will be retained.

Hobern said there are always products on a platform that aren’t supported by planners, so during a downturn rationalisation of products is not always noticeable.

“We have always had a small offering of about 60 products and that has remained consistent,” he said.

“We haven’t withdrawn any products, although some are frozen.”

Hobern said last year AMP added more options to maintain choice.

Cobb said Aviva reviews the list of products on Navigator regularly, but sometimes removing poorly supported funds can be short-sighted.

In 2002 Navigator added term-deposit products, which Cobb admitted were very poorly supported for the next six years.

“During that period there was very little interest in these products, but now they are the most popular products,” he said.

“There is no point in saying hedge funds aren’t working at present so they should be removed from the list because in a few months time they could be very popular again.”

Product offerings

Even in these troubled times, Aviva is continuing to expand its product offering.

Cobb confirmed the strategy to add SMAs to the platform was still on track and hadn’t been dropped due to the current lack of interest.

Last April BT added term deposit accounts, which have brought in about $2 billion of inflows.

“BT does get a fee from those deposits, so that has increased revenue for the platform,” Freeman said.

“Our cash accounts are also at record levels and we believe when confidence returns to markets, this money will return to managed funds and equities.”

He said adding products, such as term deposit accounts, is part of a move to offer a ‘one-stop-shop’ for advisers.

“We are now working on adding model portfolios and individually-managed accounts,” Freeman said.

“BT is finding that because we have the scale, we can just keep re-inventing the platform.”

MLC has always rationalised non-performing and legacy products since the inception of the MasterKey platform.

“We have always taken products off the platform when demand falls for them,” Waldron said.

Rubinsztein said the focus on generating revenues has meant some products are being removed from platforms.

“Product culling will continue and [these products] will be replaced by new products,” she said.

“We have seen massive inflows for any product associated with cash and these have replaced some managed funds that have attracted no interest.”

Recovery

Very few people now believe markets and the global economy will turn around this year.

Optimists believe there will be an upturn next year; the most pessimistic have cited a US think tank that believes this recession will last to 2023.

This means platform operators will need to watch costs very carefully during the next 12 months, as inflows to platforms are not expected to rise dramatically.

Maintaining efficiencies is crucial to long-term survival.

“We are putting a lot of effort into achieving efficiencies in the operation of the platform,” Hobern said.

“There are benefits of operating at a larger scale through a single platform.”

AMP is still spending money on the development of the platform and he said that will continue despite the economic crisis.

Cobb said Aviva’s focus in the next 12 months is on service to its platform users and there would be no cut back in financial support to achieve that goal.

“This will include the SMA offering and enhancing the risk products on Navigator.”

Freeman said maintaining relationships with dealer groups was the priority during the next 12 months.

“We have got great relationships with our existing dealer groups and we want to maintain that,” he said.

“We will be looking to pick up new business and we will continue to focus on costs and expenses.”

Freeman said the next 12 months will see a return to basics.

Chang also confirmed Macquarie regards investing in platform development as an important priority.

“We are still investing in the business with multi-million dollar projects such as Corporate Actions Online and flexible presets,” he said.

Waldron said the year ahead would no doubt add to the complexity of operating platforms, but MLC would have to adjust budgets to compensate for the current volumes of inflows.

“The downturn has added to the complexity of having illiquid funds on the platform,” he said.

“We will have to maintain a tight control on expenses and we will probably have to offer fewer funds on the platform as demand falls.

“But we have to support our advisers with the same levels of service in both the good and bad times.”

However, in these troubled times, Rubinsztein said it was good to have a strong parent, such as the Commonwealth Bank, to back the platform.

“We are seeing a changing landscape in platforms and some of our competitors will be facing dramatic changes in the next 12 months,” she said.

“The larger platforms will continue to expand and we expect some smaller players will outsource their operating services to survive.”