Many people think the industry is at a crossroad. We are now big enough and ugly enough to catch the attention of government, regulators, consumer associations, media and some big local and overseas players. Unfortunately, it seems to me that the passion and the camaraderie is waning. This probably is one of the sadder side effects of size. Our cosy world is coming to an end.
In many ways I count myself very fortunate. I have worked all my life in this industry, in many roles, with many interesting people. I have seen the birth of funds management companies, financial planning groups and industry associations. I have seen successes and I’ve seen disappointments. This has been and remains a growth industry that has rewarded everyone well — including our clients.
The industry is growing up. In many ways it’s consolidating, while in other ways it’s fragmenting. The different silos (super, wholesale, retail and so forth) are coming together, but the value chain is lengthening and fragmenting. Some of the results of this are turf wars, protecting vested interests, but mainly overall confusion.
Many people are looking for answers. Some are even asking me if I know the answers! I answer (after they have paid my fee) that I don’t. But I do identify what I believe are the issues facing the industry. I discuss the ramifications and some possible outcomes and opportunities. But many of the possible outcomes seem contradictory. My explanation of that is that the industry is becoming more diverse. Once we had a fairly homogenous industry, few players with defined roles. But not anymore.
One of the contradictions is that because the industry is fragmenting, is attracting new players and is at a crossroads, it’s the very time it needs passion and camaraderie. The challenges facing the industry are too big for one player.
All the industry associations (FPA, AFA, NIBA, SDIA etc) are tackling FSRB, alienation of personal services income, and the pre 95 education requirements separately. Why? Are the associations afraid to work together? Is history or some petty agenda more important than the wellbeing of the members? The manufacturers (IFSA) have got their act together, so why haven’t the distributors?
While the distribution associations waste considerable energy and resources by not collaborating on common issues, the real game is being played without them hardly noticing. And, ironically, it is the game in which the distributors (advisers) have almost absolute power. However, fortunately for the distributors, the other players are having trouble getting their act together. What is the real game? Technology.
It intrigues me that the industry that is the most suitable for technology (no physical product) is one of the laggards. To process an application costs between $70 and $200. The real cost of prospectus is $50 plus. Insurance proposals are still paper based. For once the regulator is ahead of the industry. Most efficiency would come from real straight through processing (STP).
One of the benefits of real STP is that all transactions could be fully automated. Some companies already claim they have STP, but in reality they have straight to photocopier — from which the output is re-keyed. If done properly, the systems would be real time, providing instant confirmation of transactions. This would eliminate a lot of mistakes, a lot of double handling and provide for many other efficiencies.
Savings are difficult to estimate, but it would not be unrealistic to estimate that 75 to 100 basis points could be taken out of the pricing structure without anyone’s margins not really being affected. So why hasn’t STP been done?
Do we have the technology? Yes (with a question mark). Do we have the skills? Yes. Do we have the resources? Yes. Do we have the passion to do it? Yes and no.
Recently there was a whole conference on STP and there was just about one full stream at the recent IFSA conference.
The technologists are discussing it in earnest, offering many and varied solutions. Some are based on old technology and old standards, some on new technology and new standards. And, if I’d stayed awake, I could bore you with details from the peer-to-peer versus hub debate.
These technologists have the passion and the camaraderie. So we have the technology, the skills and the passion, yet it still appears that nothing is happening. Why not?
One reason is put forward, but I reckon there are two other reasons as well. The reason being proffered is that none of the overseas technology vendors are offering solutions that suit Australia. This is probably true given some of the convoluted solutions that overseas vendors have put superannuation funds into. However, locally we have built some very good stock broking, registry and wrap systems. So we could do it if we wanted to.
My reasons are firstly that the industry is so successful that no one is under pressure to look for efficiencies and secondly it suits some of the vested interests for STP to be delayed as long as possible, or done in a way that best suits their interests. The current inefficient industry suits the large and the entrenched. An efficient, fully automated industry would make it easier for new players, especially boutique and innovative players.
One only has to remember when master trusts were taking off in the early 1990s. Some fund managers, wanting to protect their retail margins, tried very hard to scuttle them — refused product and tried to set up an alternative solution. However, the power of distribution was too strong. Also it is interesting, that as soon as the ASX started considering developing a managed fund hub (for STP), there seemed to be a revived and urgent interest from a number of the established interests.
What’s at stake is more than efficiencies, it is the control of the industry. The most efficient, but the most radical solution would eliminate the need for both unit trusts, wraps and master trusts. It could also make CHESS irrelevant and the registry companies redundant. This would further entrench the power of distribution. But where is the voice of distribution in the debate? No where — once again for two reasons.
Firstly, many advisers and dealers see wraps and master trusts as invaluable to the revenue stream and capital value of their businesses. So why would they embrace a solution that eliminated the wraps and master trusts?
Secondly, the distribution associations are currently tied up on regulatory and tax matters. But more importantly, neither they nor their members really understand the potential impact STP can have on the industry.
If STP is implemented in such a way that it just automates existing processes so that we continue to have multiple databases, current unit pricing methodologies, the efficiencies and opportunities will be minimal.
We could end up with some of the processes still manual and different systems depending on the source of the transaction. And different parts (silos) of the industry are looking for solutions that only solve their particular needs. One solution I’ve seen only benefits fund managers.
The industry is at a crossroad. It can use technology to either benefit all or frustrate many. It can decide whether it wants to continue being innovative and vibrant, or defensive and closed.
We have one of the most sophisticated financial services industries in the world. Passion and camaraderie played no small part in our achieving this. Let’s be passionate again. Let’s work together to continue to build an industry that’s the envy of the world. I believe we can.
