Future wraps: faster, smarter, easier

Chris Freeman

The ascendancy of the back-office to the front page has been a dramatic and interesting dynamic in our industry over the past decade.

Portfolio administration has revolutionised on the back of technological advances that have ultimately helped liberate financial planners from the administration outcomes of offering clients appropriate investment choice in a complex and changing regulatory environment.

From a helicopter view, the rate of growth and change in the Australian wealth management industry has been nothing short of tremendous. Since 1991, Australia’s investment fund assets have more than quadrupled. In

March 2006, total consolidated assets under management topped $1 trillion. Just five years ago platforms

comprised half the total retail funds under management (FUM). They now represent three-quarters of the market.

With the pace of change this impressive, it is often easy to forget how far we have come.

Ten years ago there was no such thing as a wrap platform. Master trusts were establishing themselves among financial planners, while a significant number of investors and their advisers accessed retail managed funds directly through fund managers. Today, almost half a million Australians invest using a wrap-type service, largely because they offer a more simple, effective and often cheaper way to manage a diversified portfolio. According to Standard and Poor’s, the total platform industry represented over $375 billion at the end of December, with the largest four players — BT, AMP, CBA and NAB — accounting for over half this amount. Super growth So what’s behind the phenomenal growth?

There’s no denying that in recent years markets have been good. Over the past 10 years the ASX 200 has more than doubled, currently sitting around the 6,000 mark (see graph p34). And yes, Australia’s mandated super system has significantly contributed to the industry growth. According to the Australian Prudential Regulation Authority, total superannuation assets in Australia increased by $149 billion during the year to June 2006, reaching $912 billion. If the growth rate experienced over the past year is the same this year, the size of the market will be closer to $1.1 trillion by June. However, our clients tell us that the phenomenal growth in the use of wrap platforms has as much to do with the functional, simple and efficient way in which wraps do what they were designed to do: administer an investor’s portfolio through a single interface. The current success of platforms and the predicted rise in their popularity and use can be attributed to the significant investment choice on offer, new standards in the regular and accessible disclosure of fees and charges and, increasingly, their ability to reduce costs to investor. Wraps are the planner’s window to the world of superannuation and investments, allowing them to buy, sell, manage and report on their clients’ portfolios.

This centralised system of managing a client’s portfolio has significantly reduced the burden of administration for advisers and in turn, increased the time available for them to offer service and advice to investors and, in turn, develop and grow their business. The vast majority of advisers now use investment platforms. More than half of advisers use three or more platforms based on the ability of the platform to process transactions quickly and accurately, resolve issues in a timely and efficiently way, provide access to a wide range of investment options and to offer a competitive fee structure that suits the profile of their clients. As with many small business owners, financial planners are often stretched for time and would rather focus on providing a service to their clients than dealing with the day-to-day administration of the business. The more time platform providers can save advisers by taking on much of the

administration requirements, the more time they will have to assist clients and the more efficient their businesses can become. But it’s not just planners who have embraced the development of platforms. Fund managers now effectively utilise platforms for much of the work that traditionally sat with them. As a sub-register for retail clients, platforms carry out tasks such as tax administration, maintenance of fund information and distribution processing services that the fund manager would otherwise be required to do. So, the significant cost of regulatory and legislative compliance, especially in the superannuation environment, is increasingly being incurred by platforms.

Platforms also offer fund managers ready access to information on fund flows and sales to assist in their targeted distribution and marketing efforts. And there is no denying that, with over $385 billion invested through platforms, they represent a significant opportunity for fund managers to reach financial planners and their clients.

The changing investment landscape Superannuation is certainly the biggest driver of change in the current investment environment. It is widely accepted that growth in super will continue to drive growth in platforms.

Australia’s superannuation system is roughly equivalent to Australia’s annual gross domestic product and is 80 per cent more than the total savings in bank accounts. This makes Australia the fourth largest pension market in the world.

Since 1992, the super market in Australia has grown 15 per cent per annum. Dexx&r forecast this growth at more than 12 per cent per annum for the next decade to reach $2.7 trillion by 2015. Plan for Life forecast $1.3 trillion in platforms by 2016.

The Government’s Budget changes to simplify super enhance this market opportunity by making it the most tax-effective way for Australians to save for retirement. In particular, BT is already seeing the flow-on effects from the one-off opportunity for those closer to retirement to make large undeducted contributions before June 30 to maximise tax-free retirement savings. In the first quarter of 2007 there has been a dramatic increase in large undeducted contributions of $100,000 or more. BT has a dedicated superannuation product, BT Super Wrap, and approximately 40 per cent of clients using BT Investment Wrap do so to manage their DIY or self-managed super fund (SMSF).

Super money continues to grow as a percentage of the overall wrap base with superannuation money now representing about 65 per cent of BT’s total wrap FUM. To position for predicted growth, wraps of the future must evolve to ensure they can meet the demands of managing larger sums of money for more and more investors.

History suggests we need to be mindful of very strong growth when making investment decisions around technology infrastructure. Successful platforms also need to prepare for continued legislative and regulatory change. BT for example will be investing over $8 million in preparation for the new super system.

Changing client expectations Superannuation will not only influence the size of the platform industry, but will continue to shape the offerings of the future. Increasing direct equity usage, particularly by SMSFs, will no doubt play a major part in product enhancement and platform development of the future. Equities now account for around 15 per cent of BT Wrap’s FUM. SMSFs are forecast to grow from $230 billion to $700 billion by 2015 and with about 40 per cent of assets, currently flowing to direct equities, platforms of the future will evolve to better integrate investment choices to meet investor and adviser demand.

The sheer size of the market will also put increasing pressure on platform providers to provide access to a wider range of investment options and meet the changing needs in asset allocation and the growing demand for alternative assets.

Quite simply, $2.7 trillion cannot be invested in the same way it is currently, with most money going to Australian equities, Australian fixed interest, Australian listed property and cash. One of the challenges for platforms is to ensure they continue to provide access to new style and alternative investments to meet the needs of sophisticated advisers while maintaining a simplified offering that is efficient and economic to use. We will no doubt see increasing asset allocations to international assets and alternative investments such as infrastructure, private equity, unlisted property and structured products. Platforms will need to evolve to cater to this need as well as build the necessary technology to facilitate the associated asset valuation and tax reporting requirements. As advisers’ and investors’ wealth needs become increasingly sophisticated, wrap functionality will continue to evolve to meet these needs.

And what about fees and commissions? Part of the rationale for the development of platforms was to meet the demand for greater fee disclosure and transparency. In many ways, wraps have led the charge on a better system for fee disclosure, and we expect continued developments in this area.

The way in which planners and fund managers charge for both service and product remains a focus of attention for the industry, media, regulators and investors. Allowing advisers flexibility in the way they charge fees and commission is an important part of platform design. Platforms are the vehicles with which advisers manage their clients’ portfolios and in this respect, they need to enable advisers and their dealer groups to administer their fee structure in the way that best suits the needs of their clients. Obviously this disclosure must meet the regulator’s standards and those set by the industry itself. Tighter compliance requirements.

While we believe platforms deliver an important and useful service, one significant misrepresentation surrounds suggestions that platforms determine which products are selected by financial planners.

This is a key issue for the wealth industry because it inappropriately describes the role of platforms, but also of dealer groups and financial planners who draw on their own research and analysis to identify products that suit their clients’ needs.

Approved product lists, not platforms, which readers will know are constructed through a formal

process of research and evaluation conducted by the dealer group’s internal research teams and independent research providers, will continue to determine the funds that can be recommended by a group’s financial advisers.

Wrap platforms have also been suggested to control fund manager access to dealer groups. Fund managers have always and will continue to promote their investment capabilities and products to dealer groups and financial planners.

The role of platforms is to make this task more efficient for many of the fund managers involved.

Creating greater value in a competitive market It is pretty much accepted that greater competition, both from local and global players, will cut the cost to investors across the value chain. Initiatives such as BT’s Wrap

Advantage program are examples of where the cost to investors has begun to fall. Wrap Advantage operates as part of BT’s existing wrap platforms with participating funds offering investors a 10 basis point rebate.

Of course, platforms will not be immune from price pressures.

The benefits from increased straight through processing (from planning software, to wrap platforms, to fund managers) to remove inefficiency, paper transactions and errors will inevitably reduce costs to investors for quality administration.

At the end of the day, platforms of the future will need to be faster, smarter and easier. We believe they’ll need to: provide investment choice and flexibility for the customer; make it even easier to invest, provide clear value for money — with transparency of all fees; have a trusted brand and strong financial backing; and make efficient and valuable connections between all participants involved in servicing the client.

The wrap evolution means that players need to respond to the changing environment at an ever increasing pace. They need to invest in the systems, processes and technology to respond to legislative changes, increasing scale,

changing adviser needs and increasingly sophisticated and engaged investors.

Chris Freeman is head of wrap

and wealth solutions at BT Financial Group.