There has been much recent debate regarding the future of the platform market as competing services and technologies are starting to emerge, that provide legitimate alternatives for practices that are looking to gain a competitive edge.

Lets be clear from the start – with net positive fund flows in excess of $27bill during 2013 (Plan For Life) , wrap operators are not really insecure about their market position. FOFA has struggled to address the largest conflict in the advice market, with vertical integration of banking / financial service conglomerates being allowed to persist.

Given the emerging landscape, in order to remain competitive and relevant, non-aligned wealth advisory groups and boutique IFAs have little choice but to consider alternatives rather than support platforms controlled by these institutionalised groups, and at the same time need to consider how to create a new, FOFA compliant revenue stream. All FOFA seemed to do for independents is increase regulatory scrutiny around both product and platform recommendations, in addition to financial revenue derived from recommending either being phased out.

A major trend so far has been to set up or ‘white label’ competing platforms, or deliver similar looking products through SMA platforms. The enhancement to the value proposition being around transparency, portfolio customisation and individual tax management – all relevant to the type of investor these groups should be targeting (HNW and SMSF).

The question is whether replacing a wrap platform with an SMA platform will really provide independent groups the edge and differentiation they need to compete and create a new sustainable revenue model. What they are effectively doing is replacing one product-platform solution with another, and probably for a similar level of fees.

If you consider the needs and desires of HNW and SMSF investors, they are after value for money advice service compared with a ‘do it myself’ alternative – nothing more, nothing less. The vast majority of these people do not have a financial adviser, are invested in cash (term deposits), and direct shares which they have purchased through an online broker.

If a firm wants to attract this type of investor, they need to think like them, and consider using an ASX trading platform in favour of another margin-clipping product-driven administration platform to support the provision a value-for-money service-led advisory proposition. It’s not that self-directed investors don’t want to, or don’t see the value in seeking advice, it’s just that there is not a great deal of confidence in the current format where it is integrated with platforms and products, hence the growth of SMSFs in the first place.

The first and foremost advantage ASX trading platforms have is they do not have the stigma of other wrap platforms and fund products in terms of kickbacks, trailing commissions, rebates, soft-dollar arrangements, volume-based incentives and under the table remuneration arrangements at the expense of clients’ hard-earned savings. What a firm is doing by executing through an ASX trading platform is saying to your prospective clients is that you too, care about the cost and transparency. Instead of units holdings in trust and nominee structures, all of their holdings are CHESS registered (secure and portable) in their name which has considerable perceived benefits to many.

The key consideration here is the opportunity to offer a truly service-led proposition that focuses on tailoring a portfolio of shares, ETFs, and listed securities (the client is already somewhat familiar with), rather than funds and products through another platform that has similar constraints such as investment, liquidity, control extra fees and a proprietary tied execution platform.

What about all the other great things wrap and SMA platforms do, such as consolidation of assets, and tax and reporting? Firstly it should be considered that reporting provided by wraps (due to the way they process data) are generally insufficient for tax reporting and audit purposes for SMSF investors. Secondly there is ongoing innovation in the portfolio administration service provider market that effectively renders much of the reporting capabilities of wrap platforms obsolete. We consider the impact and viability of some of the emerging wrap alternatives below.

  • For advisers who still prefer to access fund manager skill, the launch of ASX’s mFund service which now allows the purchase of (a limited, though increasing range) of managed funds at wholesale fee rates, through a broker, just like any other listed security. Up until now, discount brokers only offered sale of (retail fee rate) funds by effectively having a PDS download and entry fee rebate service.
  • Portfolio administration and other innovative technology-based service providers are allowing advisers to replicate or improve on many of the functions wraps currently provide, with more tailoring to business and client requirements. This includes replacing tax and reporting functions with SMSF friendly auditable double-entry accounting systems, as well as enhanced portfolio management features that wrap operators are on the back foot trying to replicate
  • More flexible managed account solutions are emerging, that enable advice businesses to run large numbers of individually customised and tax managed portfolios with scale and systemisation, under a number of business and advice model scenarios. MDA operators have dominated this space, however there are now options for firms that run an advisory model with scale, that can address the concerns of not wanting to give up control of their client assets to a third party.

These emerging trends mean that, for the cost of brokerage and (sourcing or producing research) research, more savvy wealth management firms realise that it is now possible to replicate the features and benefits of wrap and SMA platforms and fund managers, and take the investment management function (and margin) in-house. The benefit to their clients is they receive a more tailored, transparent investment service at a lower cost of delivery that is in line with their current experiences and understandings.

The challenge for wealth firms that wish to bypass platforms is to source all of the services relevant to their firm and integrate them in a way that achieves desired outcomes. Depending on the business and advice model, services can be offered on either a discretionary or advisory basis to clients, and research/ model portfolios can be either be produced internally or sourced from preferred third parties.

The investment universe is now perhaps wider than a wrap platform of relevant investments, and only defined by the range of trading platforms used (it could be multiple, including access of direct overseas shares and securities on other exchanges). Firms need to consider what this means for their business processes and what combination of technologies and solutions will best power their desired operating model and business outcomes.

It is this flexibility to adapt to different business needs that is becoming attractive to firms looking for a platform alternatives they increasingly service different client segments, run multiple brands or offer different types of portfolio services. The challenge of putting it together can be complex, however the rewards, and potential to create a sustainable revenue stream while delivering real client satisfaction within a FOFA-proof business model are , on a number of measures, likely to be more attractive than doing nothing.

To find out more, contact us at Financial Simplicity.

July 2014.

Copyright Financial Simplicity 2014.