A platform for continued success

Despite concerns that Australia’s platform market would be forced into a consolidation period at some point in the future, the past 12 months have demonstrated that all players, new and old, are continuing to benefit from strong inflows, much of which has been the result of super choice, and the increasing number of self-managed super funds being set up.

There certainly hasn’t been the rationalisation of the platform industry that was predicted some time back by the US consulting firm Cerulli Associates.

Colonial First State general manager product and investment services Brian Bissaker says net inflows totalled $7 billon last year.

“We are growing very quickly and our platform is now up to $24 billion of funds under advice (FUA).

“We are just coming up to four years and the rate of growth is exceptional.”

Macquarie Advisory Services division director Matthew Rady also reports strong inflows.

“We have been growing inflows for the past 12 months and achieved our fastest growth ever,” he says. “From April 1, 2005 to March 31, 2006, we grew by more than $5 billion.”

Rady says this growth was achieved without securing any major dealer groups that can boost FUA overnight.

“It has all been organic growth,” he says.

He adds that there are some targets platforms must hit if they want to continue to see funds under administration (FUA) growth.

“We think the market is maturing, but if you offer sound service and provide an administration platform, there is room for future growth.

“In the past 12 months there has been a healthy financial planning market, with planners servicing many new clients.”

Aviva Australia group director products Rob Donaghy says good inflows are about focusing on relationships with the advisers.

“If you have a good offering to attract the adviser and listen to what they want, then you will be supported,” he says.

A changing market

AMP manager flexible lifetime products Deanna Burke says its platform has achieved scale that enables a substantial business to be created. While scale attracts a certain amount of new business, what is happening in the financial planning marketplace is also driving growth.

“We are operating in an evolving advice market, an evolving regulatory model and all this is creating a market that will grow platforms,” she says.

“We are seeing real opportunities in retail super with super splitting and people looking at outsourcing their super into master trusts, plus we have an ageing population looking towards their retirement.

“The Government is making super flexible and simple. It is making sure people are saving for their retirement and that will generate growth for platforms.”

Burke says platform operators are in a good position to take advantage of the growing market.

According to Donaghy, super has become a big driver of platform growth and these clients want good sophisticated reporting, which platforms can deliver.

“The basic concept is unchanged at the back-end but reporting has become more sophisticated and transactions more capable,” he says.

“We see part of the platform as a tool that provides key areas to the adviser, such as tax management.

“If the platform can deliver this type of information, then the adviser is providing a service to his clients.”

SMSFs: a new driver

Donaghy says this is particularly important with self-managed super funds (SMSFs).

“These clients will need a platform that can handle tax management such as dealing with capital gains tax on particular share transactions,” he says.

“People need to be offered more comprehensive reporting that includes cashflow.”

AXA product manager David Frost says super will be a driver for platforms.

“We find 80 per cent of our new inflows are from super,” he says.

“This figure will differ depending on which platform you are talking too, but it makes up a significant part of the industry and a lot of it is discretionary money.”

Frost says the good thing about super is people have to put their money into a fund and the changes in regulations will keep platforms moving to growth for some time.

“SMSFs are growing so we launched a new SMSF service in February and it is attracting money. Even though we were late into the market, we are still attracting inflows.”

Efficient operating systems

With super providing a certain amount of inflow, advisers still want to know that the platform’s operating systems work — and work efficiently.

Bissaker says Colonial has positioned itself competitively on pricing, but this is not a guarantee to instant success.

“What advisers are looking for is value and service,” he says.

“Every transaction on the platform before 3pm is done the same day and settled the next day,” he says.

“The advisers are confident the transaction has happened.”

The Colonial platform takes the price of managed funds at the close of business on the day.

“We publish today’s price tomorrow,” Bissaker says.

“Our tax statement for the client’s investment on the platform is sent three weeks after the year end.”

He argues this type of service is what the adviser should expect and is a confirmation of the value of the service they are getting.

Because of the demands for better service, the technology spends on platforms keeps rising. Inevitably, this means the larger platform providers are the ones spending big on technology to enhance service levels. It is another factor why large inflows continue to go to the top 10 players.

Donaghy says the push for better service levels is also keeping the ‘virtual’ wrap at bay.

The ‘virtual’ wrap is used to describe financial planning software that can replicate a number of wrap services, especially in the reporting area.

“The threat from virtual platforms, unless they have the reporting, calculators and transaction processing of wraps, will not become competitors,” he says.

“As the systems become more complex, you need to spend more money, especially in areas such as transactions and reporting. At the smaller end of the wrap market, this complexity has forced the smaller companies out as they can’t keep up with the required spend on technology.”

The link to planners

However, Donaghy believes there is a role for more complex collation of data from platform into the planning software.

“The blurring between the adviser and the platform means the wrap has to link with the adviser’s software provider or the platform provides its own software such as our N-link,” he says.

“We have linked with other software providers as you need to be able to provide a statement of advice from the platform and if the platform can’t do that, the adviser will switch to one that can.”

Rady says investors are looking for good reporting from their adviser.

“What we are seeing now are new investors looking for administration of their portfolios,” he says.

“That is being driven by super choice and changing super regulations.”

Rady says Macquarie attracts both super and non-super inflows in equal proportions, however, it does see a considerable amount of direct shares inflows onto the wrap.

“Macquarie wrap is one of the largest providers of direct shares,” he says.

“About 30 per cent of FUA on the wrap is in direct shares as opposed to managed funds.

“One of the things we are seeing are planners seeking opportunities for listed equity portfolios.”

Rady says over time Macquarie has seen planners winning this direct shares business as the client seeks their considered opinions.

“There are still some question marks over how some platforms manage direct equities, but we think we are very good at it,” he says.

Badges increase

During the 90s, badged platforms were very popular, with BT badging about 45 versions at one time. The desire to badge the platform declined, but in recent times this has rebounded.

“There is some demand for badged platform from bigger groups which like to see their name on the service,” Donaghy says.

“As most advisers use two or three platforms, being badged is not an issue, but they want to know the provider to feel confident about using the platform.”

Rady says Macquarie continues to offer badged platforms and it is seeing an increase in institutional clients.

“This is where a platform provider wants to outsource the administration while retaining the brand,” he says.

“Some of the consolidation is occurring at this level but not at the traditional end of the platform market.

“There is some reduction in providers with less than $3 billion FUA and some legacy platforms are under intensive pressure.”

Rady says in the next 12 months there will be more institutional outsourcing.

“A lot of people are looking at ways to get into the market but haven’t achieved the scale,” he says.

“Look at Credit Suisse, which is perceived as a good reliable brand but hasn’t made an impact with its wrap.”

Frost says growth will continue for the big platform players as they have good distribution links with advisers.

“Most of the growth for platforms today is down to how you grow your distribution through the adviser,” he says.

“Which is why we don’t expect to see the smaller platform players getting to the top of the ladder.”

Frost says there are two factors working against them, discretionary spend on the platform and functionality.

“While there have been legislative changes, such as FSR and fee disclosure, some of which has been good, it means you have to put money into your system,” he says.

Platform independence

However, having a branded platform by a major institution is not what everybody wants.

Skandia head of investments Will Burkett says his company is well positioned to benefit from advisers who don’t want to be tied to an institutionally run platform.

“Organisations don’t want a platform that is owned by a fund manager, but they do want reliability from the platform,” he says.

“We are perfectly positioned for groups that want an alternative as we are not owned by a fund manager or bank.”

Burkett says a lot of independent financial adviser groups are starting to use Skandia as their primary platform.

“We have relied on what we call our ‘volunteer army’ of loyal planners who want to use us,” he says.

“One of the key reasons why we have grown since 2000 is the fact that banks bought platforms about that time.

“The large dealer groups are concerned about the risk of being tied to an institutional-owned platform so they identified an alternative, which is why Skandia has Count, PIS and Investor Group as clients.”

The future

The desire for choice will probably mean there will still be many platform providers this time next year.

Frost believes unless something radical happens in the industry, which will rationalise product and super, nothing will change in the platform market in the short-term.

“It is far too complicated and expensive to rationalise the big platforms,” he says.

“The platform systems make it difficult, as few competitors have similar core systems.”

Frost says it is easier for a big institution to invest the money in growing the platform rather than seek takeover targets.

However, there are software packages for operating platforms that can be bought and that will encourage some players to enter the market, but attracting advisers is key.

“You can buy licences for the software cheaply, but at the end of the day it comes down to a distribution network,” Frost says.