Endangered or enduring: The future for platforms

Platforms have proliferated and grown to colossal sizes, evolving over time to occupy a space in the financial services landscape in which they have few competitors.

The vast majority of retail investments in Australia are now placed with master trusts and wraps, and with around $2 billion in new assets flowing into the market every month from superannuation contributions alone, the platforms continue to be well nourished.

But as the environment to which the platforms have so successfully adapted changes, could new threats to their survival emerge? FMC Software managing director Enda Mahoney thinks so.

“The reason we ended up with all the platforms was to tackle the whole administration issue, but now that we’ve seen technology solutions that are again making it [administration] easier and offering a lot more automation, financial planning firms are starting to say ‘hey, we can do this by ourselves’,” he says.

Fees overload

Mahoney says financial planning groups are growing tired of the fees charged at each stage in the chain.

“At the moment they’re giving over 80, 90, 100 basis points to platform providers and fund managers and then they’re charging their 30, 40 basis points to their own clients, so there is a fair chunk of that fee structure that they’re giving to someone else.”

He says the investment process is also overcomplicated and has become inefficient as a result.

“The end investor has a relationship with the financial planner, the financial planner has a relationship with the platform provider, the platform provider has a relationship with the investment managers, and the investment managers and the platform providers then have a relationship with the custodian … there are just too many people in the process at the moment, and one thing it is not benefiting, at the end of the day, is the client.”

Do-it-yourself

In a platform-free model, Mahoney says the planner or dealer group would be supported by high-level automation through financial planning software.

“Going down that path, the end investor talks to the financial planner, the financial planner does all the administration themselves, then they just need to deal with a custodian on the far end, and obviously a broker.”

Along with advancing software, Mahoney says some financial planners are beginning to move away from unitised funds towards managed accounts, though he admits this is primarily restricted to strategies for high-net-worth clients.

“In a managed account environment, all dealer groups really need is a fund manager who will recommend the model portfolio and then they will handle the administration in-house.”

He cites Dalton Nicol Ried, a planning practice based in Brisbane, as one example of a firm that has taken on the administration function itself, however, most of this firm’s clients are individuals with more than $500,000 to invest or other financial planning firms.

Mahoney says these factors have started to “put question marks around” the need to involve platforms in the process.

Not all doom and gloom

Many in the industry reject Mahoney’s pessimistic predictions on platforms.

Coin head of distribution Darren Pettiona says if dealer groups move away from platforms, they will be returning to the days of retail-style investment, and most will find this unattractive.

“That’s a world we once had where fund managers worked very much in isolation. Advisers had to run their own unit registry systems and they ran their own back-office.”

Platforms specialise in the administration of accessing wholesales funds and Pettiona says this role is unlikely to change.

However, he does expect front-end software to start dominating consolidated reporting.

“A platform can only provide reporting in relation to the assets that it can see, whereas a typical client portfolio might have multiple platforms. They may have some direct listed equities that aren’t included in the platform, direct property, and a whole lot of direct investments. I think the front-end is definitely in a better position to be able to provide that consolidated reporting line.”

He says platform providers will have to choose whether to increase the functionality of their front-end software, or focus on the wholesale arena of providing transaction and custody engines, leaving the front-end up to other software providers, and pricing their models accordingly.

“There could be price pressure on the platforms. In reality there are too many platforms in the market now, so I think we’re going to have to see some type of consolidation in that space, because the bigger the platform the better efficiency they can create, so the better service they can provide at a more cost effective rate,” he says.

Front-end integration

Pettiona says the primary change for platforms will be “deeper integration” with front-end software.

“When I say deeper integration I’m really talking about the ability to model within the front-end and send that transactional information straight to the platform to execute those transactions,” he says.

Sealcorp chief executive Geoff Lloyd says his company has always envisaged the platform and front-end planning software being integrated.

“Platforms alone aren’t an answer. Planning software alone isn’t an answer,” he says.

Lloyd also says his company is in a different position from its competitors.

“We are a planning software business in Assirt software, and we’re the third largest by number of users, and we’re also a platform,” he says.

He says his company is continuing to develop integrated and seamless solutions between planning software and the current platform functionality.

“From a planner’s perspective what’s important are solutions that enable advice with the confidence of trusted data from the underlying supplier. The trusted data piece is the key in this equation,” he says.

Access to transactional data

According to Lloyd, stand-alone financial software providers will find it difficult to gain access to trusted transactional data because transactional data typically resides in the platforms.

“Without doubt, there is a lot more activity in the software space trying to stretch across than there is in the platform space, but again it’s about trusted data, which is the differentiator.”

Lloyd says it would be a major hurdle for financial planning software providers to compete with the platforms on transactional data.

“The cost is going to be very significant in going from planning software to a platform. The platform providers have made those investments.”

The other barrier for financial services software providers is the bottom line, Lloyd says.

“The difficulty is making money in planning software. There are a lot of providers out there, but planners won’t pay for it [software], and a lot of them aren’t even happy with the software they’ve got.”

According to a recent survey of over 700 advisers and paraplanners conducted by market research agency Brandmanagement, only 48 per cent of financial advisers are satisfied with their desktop planning software.

One size does not fit all

Oasis Asset Management general manager Wayne Lowe says financial advisers often use several financial planning software systems in their businesses, which he does not expect to change in the near-term.

“Just because a person is on one piece of front-office software doesn’t mean they’re not utilising another. Although that’s obviously not the ultimate efficiency, it is reality,” he says.

Lowe attributes this to the range of specialisations and services different planning practices offer, which makes it difficult for any software provider, either platform or desktop, to create one product to meet all the needs of every practice. He expects the delineation between front office and back office software to become less clear, but says: “There are still gaps that need to be filled and they won’t be filled immediately.”

BT head of distribution for wrap solutions Don Sillar says financial services software and platforms play different, but equally important roles in financial planning practices.

“I don’t think you can really use one without the other and, at the moment, wraps provide a big chunk of the adviser’s back-office, and financial planning software packages provide a chunk of the planner’s back-office as well. The next big challenge is for those pieces of software to come together, to communicate more, and to provide the next level of integration benefits to the adviser.”

Sillar says financial planning software packages are primarily used when advisers are formulating a plan during the client acquisition stage, setting up the client, and issuing the statement of advice.

“Whereas the wrap tends to be much more of a day-to-day management of the client’s investment portfolio,” he says.

Regulatory burdens

Rather than becoming less relevant, Sillar says platforms are now more necessary for advisers than ever.

“Now advisers have got the burden of Financial Services Reform [FSR] and compliance, the next challenge for us as platform providers is how we make that step easy for them as well. How do we streamline their whole FSR and compliance process? How do we take that pain out of the back-office and put it on the platform?”

Sillar says he has not seen examples of dealer groups abandoning platforms and taking the work in-house, and does not expect the practice to become widespread.

“You’ve only got to look at an adviser’s office and look at the amount of paper they’re already shuffling around. For them to go back and try and run the admin themselves … I would suggest they would have a very specific model with some very particular types of investments that are perhaps ‘non-wrappable’, so perhaps they have no alternative. But for the broad majority of the market, I certainly haven’t seen that trend.”

A bright future

Sillar also rejects suggestions that financial services software will become sophisticated enough over time to remove the need for platforms.

“The advantage that a wrap has is that we have the core accounting and tax records and we do all of the annual reporting for a client within the superannuation environment. That’s where the trustee resides, so we’re down in the guts of the whole portfolio management system,” he says.

“I’m not saying that financial services software providers can’t get to that position, but they’d have quite a lot of investment to go to pick up that accounting and tax record.”

Pettiona says removing platforms from the process would also create problems for unit registry and the separation of client accounts.

“Software front-ends still have to have some type of unit registry, whether that is within the software itself, which would cause a whole lot of legislative issue around custody and so forth, or whether it’s at the back with the fund manager in their office.”

He says to eliminate platforms from the process, financial services software systems would have to change their models and build unit registry systems.

“Otherwise you wouldn’t be able to separate the client accounts, so if I’m an adviser and I’m sending a whole parcel of money through that front-end, how do I know who owns that money?

“I don’t think front-end software is ever going to be sophisticated enough to build unit registry functionality within itself.”

In addition to this, Pettiona says the size of the platforms will to some extent protect them from decline. “The reality is that they can probably survive off their own internal distribution alone, let alone the external distribution and support they receive, so there’s probably going to be a good five or six of them that are always going to be there,” he says.