Investment platforms
The littleknown tools that do much of the hard work for investors are getting smarter
Intense competition by large financial institutions – typically the banks – that dominate the investment platform market has been a net positive for investors craving added functionality and better service. Between them, banks have invested big bucks updating clunky legacy platforms that have struggled to handle tax and reporting considerations in one place.
Given that investors are attracted by brands they know and trust, it’s hardly surprising bank-controlled players, such as CBA’s CFS FirstChoice, Westpac’s BT Wrap and Macquarie Wrap, have attracted a large flow of funds.
Unsurprisingly, most of the funds going into investment platforms remain adviser-directed. And, as expected, when independent financial advisers use platforms, they favour those independent of big banks.
The arrival of independent, tech-savvy newcomers such Hub24, Netwealth and Powerwrap, unencumbered by these legacy issues, has encouraged all players in the platform space to continue adding bolt-on services.
King Loong Choi, senior analyst at Investment Trends, is witnessing greater synergies between banks and the investment platforms they own and control as they attempt to catch up. For example, in 2015 CFS
FirstChoice and FirstWrap won the Investment Trends new functionality award for allowing annuities onto their platforms.
Efficient and frictionless
Beyond ubiquitous price considerations, what all platforms now recognise is that planner efficiency and “frictionless” engagement are the battleground on which new clients are won and lost, says Choi.
Nevertheless, the bigger issue confronting platforms, according to Matt Heine, joint managing director of Netwealth, is explaining to investors exactly what a platform is. While there’s no single definition, they’re first and foremost investment umbrellas that wrap up sophisticated transacting, reporting and research tools within a single client portal.
Once they understand this, the biggest questions confronting investors, says Glen Killen, of financial consultant Avalonfs, are “What can and can’t I do within my own personal name within any given platform?” and “How user-friendly is it?”.
He says greater functionality together with consolidated reporting are convincing investors/advisers to favour platforms over self-managed super funds (SMSFs). However, it’s not uncommon for financial advisers to operate an investment platform for a client in conjunction with an SMSF, typically when there’s property involved, says Killen.
“It doesn’t do anything you couldn’t do yourself but the beauty of an investment platform is its ability to generate consolidated tax reports, which ensure you don’t miss out on anything while saving you time,” says Killen.
In addition to being independent, new platforms are trying to differentiate themselves from bank-controlled platforms by pushing the envelope on investment options and research tools. That means going well beyond basic functionality, such as investing in managed funds, term deposits and cash, and direct shares.
A key point of differentiation, says Killen, is a platform’s ability to offer separately managed accounts (SMAs) and incorporate third-party assets (off-platform investments) that provide a complete picture of assets when it comes to reporting. “Arguably attracting investors to new entrants like Hub24 is their added functionality,” says Killen. “To attract new business, newcomers tend to allow in-specie transfers – both in and out – and bank-owned platforms have followed suit.”
Another competitive advantage that new gens have over the bank-controlled platforms, says Heine, is that they’re typically not managing illiquid assets that can only be bought or sold at certain intervals.
Innovation rules
With the fee structures becoming increasingly indistinguishable between providers, Choi says it’s “real” innovation that is now becoming a key point of difference between platforms.
Unlike 2013-15, when most of their development budgets were consumed by compliance costs, he says 2016 saw bank-controlled platforms turbocharge their spending on developing new functionality for planners and their clients. For example, after a lot of technology issues, it’s understood Westpac’s BT Panorama spent up to $1 billion upgrading its wealth management technology platform.
With this sort of money being thrown at platforms, Killen says that when it comes to comparing one or more providers, the devil is increasingly in the detail. For example, does a platform offer real-time and/or
The new generation push the envelope on investment options and research tools
aggregated share trading (bundled with other trades to ensure cheaper fees), what does the cash account pay in interest, how are share purchases and dividend reinvestment plans handled, and can you select your own adviser and still have their fee paid by funds under investment within the platform?
That’s why Andrew Braun, who heads Netwealth’s marketing operation, urges investors to assess the degrees of online functionality. For example, exactly how many managed fund options can you invest in, how many term deposit options are available and can you roll over and buy/sell online?
“It’s not whether you can invest in international shares per se but how many exchanges you can invest in, and not whether you can invest in the ASX but whether you can invest in the entire ASX market that matters,” says Braun.
Make the right choice
Killen maintains it’s impossible for investors to choose the right investment platform until they’ve decided what they want to invest in. For example, those who want to invest in international shares will by default knock out 75% of investment platforms from their universe.
Instead of trying to assess six or more platforms, Killen recommends narrowing it down to three.
For starters, he says whether an investor chooses a master trust over the other subset of investment platforms, namely wraps, may depend on whether they wish to invest in direct shares. While they have virtually identical admin structures, only the latter provides for this option.
He says investors will mistakenly go into a platform and then decide what they’re going to invest in, rather than the other way around.
As a case in point, while retail superannuation giant Australian-Super’s Member Direct platform provides a good range of investment options, it may lack the ease of use and functionality provided by some of the newer entrants. Australian-Super also requires investors to keep a specified minimum amount (20%) invested in its other options whether they like it or not.
While purists may argue that neither Australian-Super nor industry fund counterpart Media Super are technically investment platforms, they do provide levels of investment functionality, albeit without a comparable “wrap platform” product.
While most platforms charge between 0.5% and 2% in fees, based on tiered admin structures, Killen reminds investors it’s a user-pays system. “So don’t search for something you don’t need, like a Hub24, if a low-cost, low-function alternative does everything you want,” he says. “Similarly, if you need access to a platform via an adviser, why pay for one?”