Jackie Pearson delves into the tangled web of shelf space, rebates, margins, badging and bonuses.

Over 90 percent of new funds under man­agement flow into platforms. With the majority of these funds coming from the clients of financial planners, it seems to speak volumes about platform’s benefits in streamlining administration and client service demands.

So, are platforms the planner’s Holy Grail of building a happy client base and a healthy bot­tom line? Or do the increasingly complex deals between fund manager, platform provider, licensee and financial planner create a whole new breed of conflicts that could do more damage to your profes­sional integrity than the commission debate ever came close to?


The expansion of our superannuation and managed funds markets to in excess of $1 trillion has certainly fuelled the growth of platforms. Chris Freeman, BT’s head of wrap and wealth solutions, reminds us that 10 years ago there was no such thing as a wrap or platform.

BT set up the first wrap in response to the in­creasing market share of the Asgard and Navigator master trusts. Today the BT wrap, valued at $38 billion, covers 20 percent of the market.

Critics of such schemes say their primary function is to boost sales for the fund manager

“Our menu includes every fund manager in Australia that has a retail presence plus the top ASX 300 shares,” Freeman says.

“We have a working cash account that shows the client all transactions and gives total transparency around fees.”

According to Freeman, everyone is a winner, including the end client.

“We are not prescriptive about where to put the client’s money. We don’t see embedded advice as our role. We leave it to the dealer group to decide where to put the client’s money,” says Freeman.

Freeman acknowledges that being the admin­istrative conduit between fund manager and dealer group costs money, which is why underlying man­agers have to pay shelf space fees to have their funds listed on the BT Wrap menu. The more funds a manager lists, the lower the shelf space fee.

“You don’t get the same deal at Woolworths if you go along with one product as opposed to many,” he says.

Shelf space costs are waived if the fund manager is prepared to become a part of Wrap Advantage, BT’s new preferred partner scheme. Asgard has a similar preferred partner program with some fund managers.

“Under Wrap Advantage we take a rebate back from fees generated by the fund manager that is shared with the dealer group and the end investor. We have already rebated $1.8 million back to end investors.”

BT will not disclose the rebated amount that it keeps under Wrap Advantage, or the amount kept by dealer groups, but expects to rebate $12 million back to investors by 2011 as more managers come aboard.

According to Freeman, fund managers par­ticipate in Wrap Advantage because it gives them access to BT’s dealer group research. However, critics of such schemes say their primary function is to boost sales for the fund manager and create new revenue streams for the platform provider and dealer group. The planner and client are at the bot­tom of the food chain.


Ian Knox, the managing director of advice consultancy Paragem, says such preferential deals transport platform providers from making money through administration to collecting their own funds management fees.

“Platforms often claim to be pure adminis­tration vehicles but they behave as distribution packages and as such they demand fees not for administration purposes and those generally, in the long run, are paid for by consumers,” says Knox.

He argues that such revenue sharing is, in fact, a kickback to ensure a manager’s funds are included in the platform’s model portfolio.

“It is a cost to enable products to be recommended and sold into portfolios,” he says.

Another way platform providers make money is by distributing their own managed funds through their wrap. While the whole spectrum of fund managers might appear on a platform’s menu, its model portfolio is usually heavily weighted to in-house products or products offered by manag­ers who have some association with the parent company.

According to Rainmaker Information research, 85 percent of the money flowing into platforms ends up in internal fund options or multi-manager options.

Dealer groups are doing very nicely out of fee-sharing arrangements with platforms and man­agers, having opened up a range of new revenue sources that have nothing to do with the delivery of pure advice. Rebates from fund managers, volume bonuses from platform providers that can go as high as 50 basis points and a“badged” version of an existing platform all provide additional opportunity to add to profit margins.

A badge essentially gives the dealer group access to funds on the platform’s menu for institutional or wholesale fees. It adds its own fee margin when offering the re-branded wrap to its clients and the margin becomes a revenue stream. Badging is strictly for the big dealers.

BT, which has 52 badges, would expect a dealer to generate commitments of at least $150 million per year before it would consider offering a badge.


So how much money are platform providers and dealer groups siphoning out of the fees paid by your clients via these fee sharing deals?

According to Rainmaker Information, the biggest 30 adviser groups (by fund under advice) manage $285 billion, ranging from St George Bank with $2.94 billion up to AMP Financial Planning with $37.5 billion.

Now let’s be conservative and assume rebates, volume bonuses and other goodies going back to the dealer group add up to 0.1 percent of funds under advice. That would be a payment of $1 million per year for each of $1 billion under advice – anywhere from $2.9 million to $37.5 million per year – a handsome sum for any of the big dealer groups; the amounts are potentially much higher.


ASIC acknowledged in its 2004 research report on soft dollar benefits that fee-sharing deals do sometimes affect the selection of funds or fund managers for master trusts, wraps and multi-man­ager funds.

“Fund managers told ASIC of examples where they suspected funds failed to get onto a menu or were dropped because they had refused to pay enough,” the ASIC report states.

“Where the adviser or licensee or related entity has a fee-sharing arrangement with a platform provider or fund manager, this appears to be a benefit capable of influencing advice and so must be disclosed in the FSG and the SOA if a relevant recommendation is made,” reports ASIC.

However, ASIC is now proposing to lighten the disclosure load on the providers of what it calls Investor Directed Portfolio Services, based on the argument that “the operator does not have any role in choosing investments”.

While the rules in relation to planners who recommend platforms won’t be changed, there doesn’t seem to be any acknowledgement from the regulator that platform providers are moving away from being purely administrative structures into the realm of funds management.

“The level of influence from bodies such as IFSA, which is heavily stacked with investment managers, is obviously going to have a view that it is an administration-only vehicle. Very few inputs into ASIC come from a consumer point of view or a consumer body,” says Paragem’s Ian Knox.

He argues that it is also impossible to accu­rately disclose asset-based payments like volume bonuses anyway.

“There is no disclosure document in Australia that can explain the dollar amount of a volume bonus because it is a moving feast based on the amount of money on a platform at any given time.”


Knox says planners within some dealerships are sick of their FSGs and statements of advice being littered with attempts to explain or disguise the po­tential conflicts caused by rebates, volume bonuses and model portfolios.

“There is a huge amount of discontent from advisers owned by a licensee that is, effectively, a platform operator where the parent of the platform puts their own funds management businesses into recommended portfolios.

“The reasons for discontent are that the advis­ers are ethical, are trying to eliminate conflicts of interest and are finding that when they outsource into a recommended portfolio that the portfolio is constructed into revenue requirements, not for investment optimisation.”

One solution is for planners to break away from institution-backed dealerships and get their own license, and maintain access to platforms, but with an arms-length relationship.

“They become uncom­fortable working for a dealer who offers credits or shadow equity for giving business to a platform,” Knox says.

“They get their own license, rebate the whole volume bonus back to the client and charge more for advice.”

There are also signs that the funds manage­ment industry is becoming aware of this planner discontent. MLC is loud and proud about never demanding shelf space and selecting products for its platform menus on the basis of merit.

“Our philosophy is pretty simple,” says Anthony Waldron, general manager of MLC platforms.

“We will negotiate the best price we can with the man­ager and we will pass any discounts we get straight through to the investor. The concept of getting this transparency is that it will build trust in the indus­try by giving clarity to the end investor.”

As they say, hope springs eternal.

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