Master trusts and wraps: Regulatory ripple effect

Platforms and wraps sit at the very heart of the Australian financial planning industry.

By accident or design, they are the pumps that keep the revenue flowing — upstream to the product manufacturers, downstream to the dealer groups and financial planners.

How important are these pumps? Important enough for the Federal Government to send a shudder through the boardrooms of the nation’s largest financial services companies at the mere suggestion that any review of adviser commissions might, of necessity, also involve an examination of volume rebates.

While financial planners might welcome attention on fees being directed upstream, they would also be well aware that any changes at platform level risk a damaging trickle-down effect, impacting revenue flows into dealer groups and, ultimately, individual planners.

The level of attention being directed at the platform industry and its relationship with planners is reflected in the current review of the joint Investment and Financial Services Association (IFSA) and Financial Planning Association (FPA) payments code.

FPA chief executive Jo-Anne Bloch described the exercise as “an opportunity to review payments further up the value chain”.

The platform industry has grown and matured in Australia, not just because the major financial services houses have developed sound underlying systems and software, but also because the commercial arrangements have ensured everyone receives a share of the multi-billion dollar pie.

In the platforms equation there is something for everyone. The platforms and product manufacturers get their slice and, in return, the dealer groups get serious consideration in the form of volume rebates, a portion of which usually finds its way to the planners.

Financial planners do not prefer particular platforms simply because they deliver useful functionality and good backup. Their preference is also based on the commerciality of the rebate structures, and how this ultimately feeds into their own revenue stream.

While the average financial planning client might not understand how the commercial relationship works, all planners (whether salaried or not) are aware of how and why it delivers.

Furthermore, they are vitally aware of how the established preferences of their dealer groups feed into the equation and, therefore, the dominance of particular platform offerings.

But the volume rebates, which help drive the commercial underpinnings of financial planning dealer groups, are not unique to the financial planning industry. Industry superannuation funds are also the recipients of volume rebates from major funds management companies.

The managing director of research house, Wealth Insights, Vanessa McMahon, picks up on planner views of platforms in her regular research efforts and focus group exercises. Indeed, McMahon’s focus is so specific that Wealth Insights produces an annual service-level survey, dealing with planner views of the available platforms and what they deliver.

While functionality and utility make up a large part of what McMahon examines, she acknowledges that costs and commissions are also a factor in circumstances where planners have to be satisfied with the underlying commercial arrangements.

Year after year, McMahon’s research tends to reinforce the findings of other research, such as Plan for Life, that it is the major bank-backed platforms that dominate. For the past three years, Colonial FirstChoice has emerged as planners’ preferred vehicle, followed by Macquarie Wrap, Perpetual and Navigator.

Given the dominance of such platforms, McMahon believes that, even if there are amendments as a result of recommendations flowing from the Parliamentary Joint Committee on Corporations and Financial Services, there is unlikely to be any significant and rapid change in planner preference.

However, she does acknowledge that, notwithstanding suggestions that platform fees are not on the government’s agenda, any changes to the commercial underpinnings of platforms might see some movement over time.

“Right now, planners tend to stick with a particular platform even when someone comes along with something that is newer and offers more functionality,” McMahon said. “They do so because their existing platform works, provides reasonable backup and they are comfortable with it.”

She said a number of things, including the commercial rationale, would need to change for planners to alter their approach.

Count Financial chairman, Barry Lambert, believes that, while there has been a lot of talk on the part of the government about planner fees, commissions and the arrangements with platforms, much is being achieved by the persuasive nature of that discussion.

“That discussion, of itself, has been persuasive for change in a good way,” he said.

However, Lambert said that, notwithstanding some views that platforms were not part of that broader discussion, their role could not be ignored.

He added that if there were any move on the part of the government to alter the commercial arrangements surrounding platforms, the consequences might not prove to be all that dramatic for dealer groups of scale, such as Count.

Referencing Count’s longstanding relationship with BT, Lambert said that Count had always resiled from labelling the BT offering and becoming a product provider in its own right — something which had given rise to BT’s provision of wealth-e-account offered exclusively via Count.

Count received a rebate from BT with respect to the offering.

“Of course BT could offer wealth-e-account to others, but it has opted not to and that is a matter for them,” he said.

However, Lambert said that in the event that the legislative and regulatory environment altered the arrangement between BT and Count, then it was possible for the dealer to take ownership of wealth-e-account and then name BT as the outsourcing agent.

“This would not represent any particularly great change, but clearly there would be some changes with respect to fee flows,” he said.

The chief executive of Colonial First State, Brian Bissaker, acknowledges the implications that might flow from any changes imposed by the government.

However, he warned that looking at rebates in a simplistic, one-dimensional manner carried substantial risk in what represented a highly competitive environment.

“And if you are going to question the role of rebates, then you have to be prepared to come up with a viable alternative,” Bissaker said.

Another industry researcher, the managing director of dexx&r, Mark Kachor, said he believed the equation would be similar for those dealer groups already applying their own brands to the “white-label” offerings of the major platform providers.

However, he cautioned that whether a transition would be possible would be dependent on any changes ultimately imposed by the government.

Kachor agreed with McMahon that, irrespective of legislative change, it was likely that the majors would continue to dominate the platform industry.

“They represent a formidable presence and that’s unlikely to change,” he said.