Success takes away industry initiative

For some time now, I have wondered why our industry is not fully automated. We sell/exchange no physical products, money is just a form of information. Why don’t we have straight through processing (STP), a paperless industry? Is it because there isn’t the technology? No! Is it because the regulator hasn’t allowed it? No!

I have finally decided it is because we are too successful — there is no real competition — there is no real need to be efficient. And this applies from the adviser through to the fund manager. (No wonder the banks are so interested in wealth creation — but for whom?)

Imagine, until recently, going to the managing director of your organisation and saying, ‘I’ve got some discretionary dollars to spend. Should I spend it on marketing or efficiency?’ You would probably be sacked for asking such a stupid question. But things are about to change.

We are now entering an era where fees and charges are being questioned, of single digit returns and of competition. And now we have some players who are serious about providing the infrastructure for STP. (As I wrote last year, there is the potential for efficiency savings of 75 to 100 basis points in this industry.) The opportunity for this quantum of efficiency is starting to appeal to some players, as they realise they can reduce their fees, yet retain their margin.

This means we are going to see some seismic changes in this industry over the next few years, which means there are going to be some winners and some losers. This will apply from advisers to fund managers, even to increasing legions of service providers. It should lead to more diversity in the industry. Hopefully, the real winner out of this will be the consumer.

For advisers, who will be the winners and losers? The winners will be those advisers who realise what is their real value add, and use technology smartly. This will not be to craft bespoke plans, but to deliver efficiently the service the client really wants — and this will vary from client to client.

The focus should move from the plan to the needs of the client. The time spent on the plan should be minimal, as advantage should be taken of all the software tools that are now, and are becoming, available. Dare I suggest that the time spent on the plan, with the exception of the rarest of clients, should be less than two hours? (The (A)dvice versus the (a)dvice argument.)

For dealers, who will be the winners and losers? The losers will be those dealer groups that do not corporatise their network. They will need to provide their advisers with the tools, but especially the training, to run efficient low risk practices. The advisers will need systems and close management. The technology tools are now available to make this possible. Also those dealer groups, and advisers, who see their own or badged platform as the provider of their future riches are in for a big surprise — read on!

For too long I have been predicting the demise, if not the death, of wraps and master trusts (what I call platforms). Well, there are now things happening in the industry that are really going to challenge them shortly.

Wraps exist on the margin between retail and wholesale, which is only as wide as it is because of the inefficiencies in the industry. These inefficiencies are caused by no true STP, and that nearly each fund manager runs their own registry and commission systems. If the managers only managed the money, and outsourced the other activities, the margin between wholesale and retail would be very small. But to whom would these activities be outsourced?

Superannuation master trusts have a legislative reason to exist — the law requires trusts and trustees. However, there are some sections of the industry agitating for superannuation funds to be regulated in the same manner as non-superannuation managed investments. If this were to happen, superannuation funds would be as susceptible to technology changes happening in the industry, as are wraps.

Also, there are so many in the market now, they are becoming commodities and are being pushed further down the value chain. Fairly soon, they will be treated just like investment products — and there will be an aggregation tool to provide advisers with a common interface and a consolidated view across platforms.

This does not mean there won’t be a place for platforms in the future, but those that do survive, will be very different. Where they fit between the fund manager and the advisers’ desktops will be very interesting.

Which brings us to fund managers. They live or die according to their performance. Except if their administration is bad and their commission systems lousy. Then performance does not matter. Should they be doing their own registry, their own commissions? I would argue not. But some fund managers will not want to do this. They see their administration gives them a competitive advantage. But are they like some advisers focusing on the small (a) rather than the big (A) — in this case their real competitive advantage.

Many years ago, listed companies kept their own share registry and paid their own dividends. But since the stock exchange has been automated, none now do it — a few specialist registry companies now do it for them. With STP, there is no reason why the managed fund industry should not go the same way.

It may be that the platform providers become the registry companies of the managed fund industry. In a way they are doing this already, and they are also doing commissions. If this were to happen, with STP they could then do it with retail product, and thereby provide the client and the adviser with the ability to transfer from one platform to another easily and without triggering Capital Gains Tax. This would also facilitate the development of separate accounts — where each investor maintains directly a portfolio of the underlying investments, rather than an interest in a unit trust.

There are two other major players in the industry I have omitted so far. These are the providers of financial planning software and STP. These both have the opportunity to be winners, but like all the other players in the industry, will have to ensure they position their offering where the industry is going to be and not where it has been.

Which, as an aside, reminds me of superannuation funds. Many are now moving into providing financial planing. Unfortunately, most are using yesterday’s model, which means shortly they will be wondering why it is costing them so much and for so little reward. Then they will get their first claim — and discover risk management.

Hopefully, I have been able to give you an appreciation of the impact of technology on the industry over the next few years. As always, with change, there are winners and losers. History suggests that the winners are those that capitalise in a considered and smart way. They look for both themselves and their client to be winners. The losers are both the ostriches and those who grab change without due consideration.

We are in for exciting times. The industry will be more diverse, there will be more ways to do things, and more opportunities for both the players in the industry and the consumers.