Ian Knox says savvy advisers should develop value propositions that reduce the cost of administration and portfolio management.
In the wake of the Government’s Future of Financial Advice reforms, it appears some financial planners are reconsidering their future as the ban on commissions and volume bonuses makes it harder to earn a living from giving advice. Some say it’s just getting too hard, while others feel it’s time to retire or get out before practice valuations fall. While we await the final outcome of regulatory change, it’s worth pondering some of the likely outcomes emerging from the reform and, in particular, the implications for platforms and their financial relationship with dealer groups.
Platforms provide a useful level of consolidated reporting for advisers and, according to the Government reviews, a somewhat questionable and conflicted thoroughfare to shared revenue via rebates for many dealer groups. Dealer groups use this revenue to fund support services for their planners and increasingly to top up profits – because when product revenues cease, future profits will be squeezed. The business model is believed by many to be dated and financially unsustainable as the industry moves to fee for service. There is also an increasing view that platforms can create conflict because they are selected based on volume bonus agreements or the dealer’s ownership, not their administration capability. Interestingly, consumers, not planners, pay for the platform – although it’s portrayed as the planner’s back office service function. If fiduciary responsibilities become enshrined in law, one wonders what will happen if it’s in the client’s best interests not to use a platform.
Whatever the regulatory outcome, it’s clearly time to change work practices. What a shame the wealth management leaders failed to self-regulate with a conflict-free, low-cost and more efficient set of technology tools. So much for platform heads giving wise advice to planners to change their business models when the main game in town is equally looking 10 years out of date. By way of perspective, the platform market in Australia has been dominant in terms of product flow and market share for more than 10 years, having made its entrance via master trusts in the late 90s and wraps in the early part of this decade. Indeed, some are still selling master trusts at circa 3 per cent annual fees.
After nearly 15 years of technology progress, consumer activism and talk of scale benefits, the sad reality is the cost of diversified investing hasn’t actually fallen for most consumers. While there are many reasons for this, it can be argued technology development has been deliberately limited to support high margins. High margins assure distribution rights to planning practices. This is why some platforms offer badges with dealer groups; it has very little to do with transparent pricing or lower processing costs for consumers. Now the volume bonus genie is out of the bottle, it seems many aren’t equipped to handle the potential banning of these lucrative earners. Indeed, the platform operators and, in particular, those that offer badged versions, are lobbying against changes with the argument that platforms are a service and not a product. It seems the Government may have to settle on a compromise lest too many in the industry struggle to adapt without the income.
That’s why many dealers are talking about “white labelling” and assuming the trustee role, so the product is owned by the dealer, not the platform operator. This only creates further conflicts at the advice level, which is exactly what regulation is trying to address and what independent advisers claim is wrong with institutional dealerships. Further thought may be needed before entering the fray dressed like one’s opponent. For the purists, platforms are strange beasts in that they are classified as investor directed portfolio service (IDPS) “like”, instead of being classified as a product. Go figure the difference: one pays commissions, the other pays a volume bonus. Retaining volume bonuses while banning commissions doesn’t exactly reflect the spirit of the reform’s intent, which is prompting many to pursue lower-cost, non-conflicted alternatives or rebate bonuses back to clients. Despite this trend, platforms have been slow to respond with technology improvements that support client rebates.
Platform heads need to accelerate this capability and those that respond early will be better placed to capture market share. Let’s also remember that, somewhat ironically, eliminating volume bonuses won’t actually cost the platforms money with the big dealerships anyway. This is because they don’t keep the margin; it’s just a cosmetic tool used to retain distribution relationships. The final point worth making is the role of platforms, fund managers and planners in a deleveraging investment world where an expected return from a diversified managed portfolio is about 8 per cent per annum. If this is true, then nearly 30 per cent of this 8 per cent will be eroded by fees and charges, leaving consumers with the choice of a risk-free return in bank deposits without advice – or seek advice and carry an equity risk to attain the same rate. The end result leaves advisers at the coal face to carry the burden of unrealistic fees and charges for what amounts to portfolio reporting. That’s one ugly aspect of the reforms – the truth in cost of services.
In Australia we are now seeing some competition for the platforms with the arrival of simple and easy-to-use technology supporting individual and separately managed accounts – so-called managed accounts. This is a natural and progressive development where portfolio reporting is low cost and the assets are capable of being held in the name of the client, thus providing better tax benefits, greater flexibility and ultimate transparency. This market has been prevalent overseas for years where competition is rife and delivery of personalised reporting is commoditised. This is not a new development and advisers have a right to demand less complacency in platforms and more technology breakthroughs for clients.
Managed accounts are not to be confused with a managed fund, which is investment via a pooled unit trust structure. Many feel this process of investment is dated, expensive and ineffective for smart investors, particularly the private client style operators and the self-managed super fund (SMSF) market. These markets are trending towards low-cost diversification and direct ownership through exchange traded funds (ETFs). ETFs are effectively a direct share investment that recreates a given index. They are liquid, traded on markets and owned by the investor. By putting the new technology and ETFs together, advisers can now access capital markets effectively with portfolio reporting, custody, administration and asset management – all for less than 1 per cent. This differs from many of today’s platforms (and dealer badges) which charge up to 1.2 per cent for administration plus up to 1.2 per cent for funds management.
There’s not much money left over for advice when these costs are tallied up. Yet advice carries the risk, the liability and the client engagement process – it’s all back to front. Finally, it’s fair to acknowledge the proposed reforms have an overall spirit of intent that is well meaning but, when enacted, has the capacity to adversely affect today’s work processes such that short-term turmoil evolves. This is inevitable unless some grandfathering occurs, but it is equally a challenge for us all to work seamlessly in meeting the agenda. This means the platform market must also be reformed, not just advice practices.
As the old saying goes, the trend is your friend and the trend seems to be:
- Growth in member directed accounts
- Growth in managed accounts
- Growth in ETFs
- Growth in SMSFs
- Growth in fees-based advice
Our industry challenge is to respond to all of the above with an eye to how it improves clients’ lives and meets their objectives using better technology and improved adviser skills. Then we’ll be in control and able to minimise regulatory intervention. The target is clear: lower cost administration and portfolio reporting; lower cost funds management; and higher revenue in the critical part of the value chain: advice.