A slice here, a slice there – platform costs add up

While platform operators talk about scale driving cost efficiencies, critics argue there has been very little difference in the cost structure for investors over the past decade.

According to Ian Knox, founder of Paragem, a privately-owned dealer services advisory company targeting small to medium advice firms, there’s no viable benchmark in the industry to confirm whether scale is relevant and very few platform businesses are even willing to disclose their financials to the market.

“The industry talks about scale but, relative to other commoditised administration industries, very few players appear to know their true unit costs in the platform industry. Likewise, the trend to badging-in for dealer groups has an inverse logic to creating scale in an industry that claims scale is everything.”

Benefits for investors?

Badging is all about platforms controlling channel management and not wanting advisers to access their retail platforms for the same cost, Knox says.

“This means the adviser gets access to a platform wholesale rate and inevitably takes a slice of the margin when the end customer pays the retail price. Platforms are therefore at a more mature stage where their priorities are now their business risk and their profit needs.”

With administration fees reducing by 20 to 25 per cent over the past 18 months, Knox and others point out that the investor is yet to benefit meaningfully and any savings have been largely absorbed as volume rebates back to dealer groups.

“Most commentators would argue that post-FSRA, platforms are categorised as a product. Platforms currently receive up to 85 per cent of all investment placings and determine commission payments and price to advisers.

“In effect, platforms have now done the full circle and represent the same cost base as the retail industry some 10 years ago. The idea was to access wholesale funds and consolidate them for planners. This disintermediated retail fund managers, yet today disintermediation of platforms results in lower cost and better benefits for investors,” Knox says.

“The nexus that needs to be broken is the platform operator owning the dealership and providing the dealer support services, which are all aimed back at having the adviser use the underlying platform provided by the owner…in an age of transparency, the aligned dealer networks don’t really have choice, irrespective of suitability of platform to clients,” he adds.

Technological standstill

While straight-through processing (STP) is hailed as the next big thing, Knox says: “As yet, the industry hasn’t found an agreeable way to do STP and in the short-term, the ASX hub failure virtually eliminated a co-operative industry approach to sharing costs of transactions. Effectively, if the industry wants to reduce costs through STP then it needs leadership to do it…which should come from a major player seeking to lead the way.

“Unfortunately, there is greater financial gain in the short-term for many majors not to take this initiative, leaving the entrance door open for new industry participants such as the telecommunications industry, the custody industry and major outsourcing groups with IT and operational skills.

“As soon as a new entrant emerges and uses true scale measurements and charges fees based on transactions, the platform industry will change. Conversely, the platform industry may become extinct if it can’t move in this direction.”

Unbundled products

In other views on pricing trends, Skandia has tipped a discount “over the next few years by approximately another 1 per cent, but regulation surrounding consolidation could generate additional costs”, Skandia Australia CEO Ross Laidlaw says.

Skandia’s two product suites are split between Skandia Global Solutions operating on an unbundled fee structure where each fee is a separate transaction on the clients’ account and Skandia One, a bundled product where the management expense ration (MER) includes any administration fees as well as a built in 55 basis point trail commission

Laidlaw says that Skandia Global appeals to boutique dealer groups because they can “dial their commission up or down dependent on their clients’ needs”.

The MER for Skandia Global Investment Solutions ranges from 1.05 per cent to 3.29 per cent (for the year ended June 30, 2004).

The MER for Skandia One Investment Solutions, which targets large dealer groups, ranges from 1.63 per cent to 3.74 per cent (for the year ended June 30, 2004).

Compulsory fee transparency

New regulations on fee disclosure, the result of an amendment to the Corporations Act from July, demand that fund managers and platforms use a template to breakdown each charge.

Most operators and advisers have been rolling off revised brochures and product disclosure statements over the past few months, with some using supplementaries in the interim or much larger documents as a matter of requirement.

Alan Kenny, head of platforms at Colonial First State, says the group offers flexibility in pricing models with FirstChoice and FirstChoice Wholesales.

FirstChoice has a bundled fee, which includes an investment management fee, administration and advice commissions with an average of 1.7 per cent. FirstChoice Wholesale averages 1 per cent and unbundles the advice component leaving the adviser to negotiate that with the client.

“Pricing structures do differ in the market with some platforms offering bundled or combined fees and some separate them out. In our experience with advisers there is a need and use for both models.

“I believe the lines of differentiation between full service platforms and what has been coined as ‘baby wraps’ will continue to blur. Sophisticated adviser functionality, once the competitive advantage of full service platforms, is now been addressed by some of the newer platforms. FirstChoice, for example, is rapidly building online services which provide value to advisers in managing their business efficiently,” Kenny says.

Wholesale rates

Of course, the major benefit and subsequent growth in demand for platforms are all about accessing a superior, outsourced administration service allowing investors to get reports over the Internet. The second benefit is about scale on fees and access to the wholesale fund rates.

So what are the wholesale rates? Are they same for all platforms and, if not, why not? Industry sources say wholesale rates do differ.

Mark Arnold, of Lawler Financial Services, observes: ‘‘Different wrap platforms quote wholesale rates, but these vary from platform to platform for the same fund due to arrangements and rebates — hence a distortion. A more efficient approach is that the member pays the actual cost of the platform…and there are no rebates, just fund management fees. The platform provider would be paid for what they do and it would be more transparent.

“Self-regulation doesn’t work and it’s not necessarily efficient in the market place… the counter argument is that if you’re happy with the service then fine. Supporters of this argument point out that you don’t know how much retailers or the car salesmen gets in terms of mark-up, so what’s the problem?” he adds.

Today’s reality

Tamworth-based planner Ray Griffin is in the minority when he says platforms are expensive for what you get, but he makes a valid point.

“With platforms, there’s a lot less for advisers to do these days. I don’t know whether adviser fees have dropped to reflect that. You can argue that platforms have added another layer of cost into the process so it comes back to value for money. When you drill down, are they providing that value?

“If you lose confidence in that platform, then selling out of a master trust to go to another may mean a major capital gains tax consequence…it’s not just the cost of moving from the service — there are tax issues.”

However, some master trusts do allow in specie transfer provided that product is on the new platform menu.

Recent Rice Walker Actuaries data shows a cost compression in expense ratios for superannuation fees and expenses between June 2002 and 2004. Overall, fees fell from 1.36 per cent to 1.29 per cent.

The study shows that advice costs 85 basis points and that this is built into product pricing, according to John O’Shaughnessy, deputy CEO at the Investment and Financial Services Association.

“Administration and investment costs across the retail system are similar, with the main differentiator being that advice is built into some products and is an additional cost in others,” he says.