Plugging into the power of platforms

Four years ago, Boston-based consulting firm Cerulli Partners made a big call on the future of the Australian platform industry, saying by 2004 the number of main players would have reduced to four or five.

Although the data from this year’s Dexx&r platform market share report shows that the big players like BT, Macquarie and Asgard still dominate the non-super platform arena, consolidation to the extent of Cerulli’s prediction is still looking a long way off.

In the past year classic non-aligned investment managers Perpetual and Credit Suisse Asset Management (CSAM), which five years ago probably wouldn’t have even toyed with the idea of positioning themselves as major platform providers, have hopped aboard the band wagon with their WealthFocus and MasterWrap offerings.

Adding to the squeeze are a growing number of low fee, low service, ‘baby platforms’ offered by more experienced industry players like AXA, which last month followed in the footsteps of Colonial First State, ING and others by releasing Generations, its own low-cost master fund.

All this activity has been prompted by one thing: the desire of all financial services groups to get a bigger slice of the phenomenal amount of client funds that continue to flow through advisers into investment markets.

The Dexx&r annual market share report to June 2004 shows inflows into non-super platforms have increased 15 per cent from about $110 billion to $127 billion in the last year — way too much money for any fund manager to ignore.

Dexx&r director Mark Kachor says strong equity market performance in the past 12 months, and not necessarily new business, has played a big part in increased funds flowing into platforms.

“Certainly a lot of that is being driven by very favourable economic conditions, not necessarily in the growth of new business,” Kachor says.

But Kachor concedes these massive inflows are also indicative of the way master trusts and wraps have overshadowed individual unit trusts, in both the super and non-super sectors. This could be because advisers are becoming progressively happier to let a platform operator take care of back-office and administration duties, so they can concentrate on building their client base.

This preference for platforms among advisers, which is also partly fuelled by the increasing efficiency of platform products on offer, has just about left the individual retail unit trust market for dead. Large players are almost being forced into creating new platforms if they want to hold on to their slice of the pie.

CSAM head of platform development Robert Hayward says: “Given that pure retail has now been replaced by master trusts, if we wanted to continue to have a strong involvement in that market we logically needed to bring out a platform.

“We saw that there were areas where the market was immature, technology was one and price was another.”

The issue of price is a crucial one.

Of the new players to enter the market in recent times, the focus has been largely on low-cost master trusts and ‘baby wraps’.

The primary selling point for such low fuss platforms is simple: they charge much lower fees at the expense of providing less investment flexibility and a smaller investment choice to clients.

The idea is no longer that new. When Colonial First State (CFS) hit the jackpot with FirstChoice in 2002, a host of other big players realised they should probably follow suit. BT released its Essentials platform about 15 months ago, as did ING with OneAnswer. Asgard came out with Elements in April this year.

AXA’s Generations platform is the most recent release of such a product, hitting the market only a few months ago.

The fact that AXA released Generations even though it has an existing full service master trust, Summit, is a clear signal of how low cost platforms are now seen as an integral part of the bigger financial services groups’ platform strategy.

“We felt that offering a range of offers….was another step forward in the market place,” AXA head of wrap David Frost says.

He also believes AXA hasn’t missed the boat with Generations, even though the group was beaten to the punch by many of its competitors.

“We still think there’s a huge opportunity [in these products]. There’s a lot of investors who quite frankly still need advice and may not have a lot of money to invest in the platforms we had previously developed.”

The drive towards lower cost platforms has also been aided by a realisation of the market power platform providers now have.

Kachor says the big platform providers are using their considerable market share to put pressure on fund managers to reduce their fees.

“For example, BT is able to exert considerable pressure on the actual investment managers to reduce their margins, given the amount of funds that are coming from all the BT wraps collectively,” Kachor says.

“So what we seem to be seeing is that the reduction in investment manager costs has in some cases been passed onto the retail investor, but more importantly it has led to the creation of these baby wraps.”

But fund managers aren’t the only ones under pressure to cut fees.

Platforms are being leaned on by powerful dealer groups to create new products with lower fees, and not just at the lower income end of the platform market.

Count Financial, for example, recently negotiated a deal with BT to provide it with a new product, Platform2, that offers lower fees of 23 basis points for investors with more than $750,000.

Count managing director Barry Lambert says with $2.2 billion in BT wrap products, he had the leverage to get a better deal on fees, a concession he doubts other dealer groups will be able to get out of BT.

Lambert also has a theory on why the number of platforms in the market have been increasing recently.

He says independent dealer groups need to be seen to be offering their advisers the opportunity to choose from a number of platforms, to avoid any perception they are not acting in the best interest of clients by favouring any one particular provider.

Count itself has a list of six preferred platforms.

This seems to be in line with current industry trends.

Recent survey results released by Assirt Research show the number of financial planners prepared to use three or more platforms has more than doubled from 19 per cent to 41 per cent over the past 12 months.

Melbourne financial planner Rob Swanton, a managing director of Swanton & Davidson, says one of the reasons for this escalation is that advisers might feel different platforms are more appropriate for different clients.

But Swanton, like Lambert, believes the main reason is adviser integrity.

“I think the big issue going on of late is that a lot of dealer groups are pushing or encouraging their advisers to use one platform and I’m sure that’s not always in the best interests of the client,” he says.

“Platforms are part of your tools. And you’ve got to find the right one for that client rather than just treading the party line and using one that’s got the greatest amount of commission or rebate.”

Swanton says this is why he feels “very uncomfortable” with dealerships creating their own badged platforms.

“We felt there was a conflict of interest there.”

A large number of other dealerships, however, don’t feel as squeamish.

Dexx&r’s Mark Kachor says badged, or ‘white label’, platforms are the fastest growing area of the market.

Badging basically involves a dealer group slapping their own name on a master fund or wrap provider’s products and selling it to clients as their own.

Kachor reckons close to 60 dealer groups now use a badged platform, with BT and Macquarie the largest suppliers.

The majority of BT and Macquarie’s products are offered in badged form because they don’t own their own dealer groups to distribute products and offering badges was the only way they could muscle in on the retail platform market, according to Kachor.

Badges work for dealer groups because they get to say they have their own platform. Kachor says it is also likely advisers will get a higher cut of commission from the platform provider if they put their clients’ money into the badged platform.

“The reality is the dealer is getting more for using the badged platform, so they might be getting 80 basis points if they use their own BT-badged platform instead of getting, say, 60 off another platform provider.”

Even though badges are popular with dealer groups, there are those who say their star may be on the decline.

Aviva chief operating officer Grant Salmon says the trend towards fee unbundling, brought on by increasingly stringent Australian Securities and Investments Commission (ASIC) requirements, might signal a slowdown in the use of badges, as clients become more informed about the commission process.

Darren Wise, managing director of dealer group Financial Planning Services, says although he uses a badged platform, his is the only dealer group he knows of that doesn’t pay its advisers any commission received from the platform.

Wise thinks the days of a dealer taking a cut from badged platforms are numbered.

“Personally I think platforms that are badged realistically have to be commercially honest. And I would be thinking that if extra commissions, or what we call soft dollar deals, are tied up within those platforms, I think dealer groups are going to struggle to maintain badged products moving forward.”