Wrap accounts: the banks’ ticket to distribution

With the BT and Rothschild acquisitions this year, Westpac became the second biggest in the fast-growing wrap account and master trust sector with combined funds of $11 billion.

Taken together with its existing master trusts, Westpac’s platforms ranked number one for inflows, capturing one third of the market. As well as the BT Wrap platform, Westpac also acquired BT’s corporate superannuation business and platform.

“This will result in the creation of a major new force in wealth management,” Westpac’s chief executive, David Morgan claims.

Compared to its major competitors, Westpac was perceived as having a gap in its funds management, and according to Morgan, BT fills the gaps in the bank’s wealth management platform, especially in bolstering distribution.

When Westpac made it’s first (unsuccessful) bid for BT in 1999, the deal was about funds under management (FUM) and volume. Today, it is about distribution and technology. BT’s value to Westpac is in the BT Wrap with its technological capabilities, and the acquisition epitomises today’s major trends. Westpac will greatly improve its distribution by getting access to BT’s still-strong relationships with independent financial advisers (IFAs) — and distribution in Australia is still 95 per cent through advisers.

Both the success of BT Wrap and its increased importance within BT reflect its shift in business focus from proprietary managed funds towards a more open architecture model, which also offered the products of other managers. Platforms enable the shift to the lower-risk multi-manager strategy. BT Wrap has done so well because it has developed a reputation for good administration and service. This was the result of investing about $100 million in its wrap technology platform. Westpac attributes only 25 per cent of BT’s value to its retail products and distribution while it values BT Wrap at 30 per cent. This reflects the way in which the financial planning and funds management industries are changing. BT’s retail managed funds have suffered outflows of between $6 to 7 billion over the past 18 months and, since the buyout, is bleeding between $5 million and $8 million dollars a day from its Australian equities funds.

But the BT Wrap has continued to grow, cementing its position as one of the wrap and master trust market leaders. At June 30, 2002, BT Wrap and SuperWrap had some $6.8 billion in FUM and still growing — even though they are barely breaking even.

Changing nature of industry

Master trusts and wrap accounts — increasingly becoming known as platforms — depend on technology and make up the fastest-growing segment of Australia’s financial services industry.

Plan for Life’s Australian Retail Investments Market Share and Dynamics Report as at June 30, 2002, shows that wraps and master trusts grew 12.4 per cent in 2001-02 to $152.9 billion. This represents 52.55 per cent of total retail products and 20.2 per cent of gross managed funds.

BT’s shift from proprietary products to third party product distribution mirrors the change in the entire industry in both wholesale and retail funds management. Fund managers and banks have realised that as long as they are able to offer a complete suite of products using a supermarket approach, they do not need to manufacture all the products themselves. Similarly, they do not have to manage all the funds as they can manage other fund managers.

The shifts in power are from investment management to investment administration, from the product manufacturers to the distributors, from fund managers to platform administrators, ie. the wraps and master trusts operators. They are the new gatekeepers to the bulk of the managed funds in Australia.

In these circumstances, wraps and master trusts have come into their own. They represent the promise of convenience and efficiency while allowing for specialisation amongst fund managers, fund administrators and technology providers.

As a result, relationships within the funds management industry will change dramatically. As the wraps and master trust operators gain profile and brand recognition in the marketplace (Navigator’s mainstream media ads are an example of this) and ever more funds flow into them, fund managers will have to market themselves not to the retail or wholesale (corporate) clients, but to the operators to get “shelf space” in the master trust supermarkets. The appearance of “shelf” fees charged by some operators like Macquarie is indicative of things to come.

One consequence of this is that the pie is now being divided up differently as the value chain changes. The cost and economics of the technology-driven platforms demand scale. In theory, scale, efficiency and convenience should lead to a lowering of fees for investors. Generally speaking, this has not happened in Australia yet, although pressures on fees continue to grow. The power, and hence the margin, in funds management is likely to shift from the fund managers to the operators.

The cost of technology is the origin of Cerulli’s well-known prediction in 2000 that only some four or five operators will survive in the Australian market within a few years. While Look Research believes that the number of successful operators will be greater than this, the trend is correct.

The Banks

Blocked from merging by the four pillars policy, the major banks have chased growth in funds management and wealth creation. Over the past five years the top five banks have each acquired distribution and now dominate, according to the recent Money Management Top100 Survey.

The banks have each gone about it in different ways — St George bought Sealcorp and its Securitor and PACT dealerships, along with the Asgard master trust which had extensive distribution to independent financial advisers (IFAs).

The Commonwealth Bank of Australia (CBA) bought Colonial and its bank, life company, dealerships, master trusts (originating from Colonial, Legal & General, and Prudential) along with the Colonial First State funds management business which had extensive distribution to IFAs.

The National Bank (NAB) purchased MLC, acquiring multiple dealerships, the FlexiPlan and MasterKey master trusts and the MLC fund manager, with both the master trusts and fund manager having extensive distribution to IFAs.

NAB subsequently bought Deutsche Financial Planning and Deutsche Funds Management.

In 2002 the remaining two banks refrained from buying dealerships, instead buying, or buying into, fund managers with extensive distribution to IFAs. ANZ entered into a 50/50 joint venture with ING which involved joint product manufacture (including new master trusts) and funds management, but retaining separate dealerships.

As platforms are dependent on technology, only those players with the capacity to build and administer very expensive, complex and scaleable platforms are likely to survive. They are likely to include the big banks as well as AMP, AXA, Challenger, ING, IOOF, Macquarie, Norwich Navigator and Questor, and a handful of other players.

Leo Wassercug is managingdirector of Look Research.