The new frontiers in financial services

The term retail means less now than it did five years ago.

Back then it described a part of the financial services market that was unique in its approach to individual investors, pooling the funds of mum and dad investors, and accessing wholesale funds through investment vehicles such as unit trusts.

But over the past five years, the retailisation of the wholesale market has blurred the boundaries between the retail and wholesale sectors and expanded the service provision of both.

It has closed the gap so that wholesale fund managers, asset consultants and superannuation funds now can, and are seeking to do, similar business as their retail counterparts.

Evidence of this convergence in the marketplace can be seen in many of the ways different sectors of the market are approaching their core business.

Wholesale fund managers appear on the recommended manager lists of retail master trusts and access superannuation clients; wholesale asset consultants offer clients their own range of investment products, and superannuation funds are increasingly looking to diversify beyond their core business into financial planning and establishing auxiliary products and services.

“The wholesale/retail divide — is there one? What was wholesale five years ago is rapidly showing signs of becoming retail,” Investment and Financial Services Association (IFSA) deputy chief executive officer, Richard Gilbert, says.

He says there is intense interest in both sectors of the market and the overlap between them is becoming more obvious.

“Marketing strategies and human resources have been adjusted to ensure participants can deal in both markets,” he says.

One of the main factors driving the retailisation trend in the wholesale marketplace is competition.

According to Access Economics director, David Chessell, the pressures of competition are so powerful and the pressure to innovate so high, that wholesale superannuation funds have to look at ways to expand their business.

While wholesale superannuation funds such as industry funds are highly efficient as low cost providers, Chessell says the straight economics of the industry means they are at the lower end of the supply curve.

However, driving the retailisation of wholesale funds is market pressure to offer investment choice.

“Five to 10 years ago, most major funds offered the trustee selection. Over the last few years, there is a trend to offer three to five options,” Chessell says.

Also making them more like retail funds is the provision by some wholesale superannuation funds of investment products such as allocated pensions. In this way, funds take a cradle-to-grave approach to their members and can retain them after the accumulation stage.

MLC chief executive officer funds management, Geoffrey Summerhayes says in terms of market sophistication, the pendulum has swung away from the wholesale market and towards the retail market, which has become more sophisticated and more innovative.

“The retail market has evolved rapidly with increased customer sophistication, the emergence of planners into a profession, and the onslaught of competition that has left the strong domestic players the winners,” he says.

Summerhayes says because of this the industry has developed from a product sales focus to more emphasis on strategic advice.

“And it is yet to enter the phase of holistic advice that has asset and debt consideration,” he says.

According to BT’s head of product development Brian Bissaker, the blurring of the boundaries between retail and wholesale presents many opportunities for the financial planning industry.

“There will be sensational opportunities, bringing people to the table kicking and screaming who would have been loathe to consider financial planning in the past,” he says.

Bissaker says the effect of the convergence trend will mean people need a financial planner even more than ever before. Growing consumerism, technological enhancements that make it easier for consumers to compare and shop around, increased media attention to personal finance and the daily unit pricing and switching options available in investing, are all going to fuel people’s need for advice.

In the big picture, Bissaker says large institutions that have a strong retail brand and presence and good distribution networks such as banks, are going to be well positioned.

The move by the wholesale market into the retail domain has occurred quite smoothly with business development arms of wholesale businesses getting involved through master trusts and corporate funds.

Bissaker says the introduction of master trusts and wrap services have changed both consumers and advisers expectations of what wholesale fund managers can do.

“Retailisation makes consumers and advisers want to have better tools to work with,” he says.

While the convergence in the market may mean increased transaction costs for wholesale funds, Gilbert says it is important to take a holistic approach and understand that on the retail side, consumers will gain access to cheaper services.

He says with the investment risk now being borne by the individual rather than the fund manager, investors are looking for diversified portfolios and to spread risk over a range of investments — further facilitating the retailisation trend.

Of course, alongside these concerns is the increased need for regulation and compliance.

“The MIA (Managed Investment Act) was originally designed for the retail side and FSR (Financial Sector Reform) means wholesale will now come under that,” Gilbert says.

He says there are significant opportunities for the wholesale market because there is not a whole host of newcomers entering the wholesale market and it is not growing exponentially.

Gilbert predicts a boom time for financial planners because of investor’s appetite for the multi-manager approach.

“Financial planners have their own role and can offer value for clients,” he says.

Gilbert says one of the key issues for the wholesale sector in its rush to retailise is overcoming remuneration issues.

While the financial planning industry has operated in a structured remuneration environment for some time, this is quite foreign to the wholesale sector.

Deutsche Asset Managements head of corporate sector, Ken Lockery, says it is this remuneration aspect of the financial planning industry that will make financial planners they key beneficiaries of the process of retailisation.

“In the wholesale market, it is very different because it is not a money-making entity whose product is designed around it. The whole concept of retail is that decisions are being made by individuals as opposed to aggregating and someone else making the investment decision.”

Lockery says people’s fear of making the wrong investment decision keeps the role of the financial advisers more pivotal than ever.

Financial Planning Association’s senior policy manager, Con Hristodoulidis, says the trend is healthy for the industry as a whole and for the profession of financial planning.

“It keeps them honest. They look for efficiencies and are more competitive in their processes,” he says.

Hristodoulidis says because more wholesale businesses are seeking distribution channels, strategic alliances are going to become even more common.

“There are threats and there are dangers to retailisation. But financial planners need to stick to their business plans and consider business partnerships in the context of their business plan.”