How to build a zero cost platform

The first ads for ING Direct’s Living Super are now on television, with the focus on the no-fee options as a solution for worried super fund members (picture a visual of a middle aged male – presumably the target market – who can’t sleep).

The visual flashes to text outlining the options the no-fee feature applies to. As Trialogue readers will know from last week, the no-fee options apply only to certain aspects of Living Super. But the point here is that we are seeing an intensification of the price competition phase which opened with BT Super for Life.

Traditionally, super funds have mostly competed on value – investment returns, service, technology etc. Industry funds owned the price space, but as past Tria research has shown, industry fund prices rose substantially last decade. This opened the way for competitors with new low cost offers to enter and match or undercut them.

BT Super for Life was the first major offer of this type, quickly followed by AMP Flexible Super, CFS Firstchoice Wholesale, Macquarie Consolidator, and others. This has been accompanied by unbundling of commissions, and outright price cuts on some existing products.

With prices falling rapidly, we’ve speculated that we might see the first zero cost platform.

ING Living Super is an example of how you can create a zero cost investment option pretty easily – you combine assets with no explicit MER. These could include deposits, REITs, LICs, and ETFs for example. It’s smoke and mirrors in a sense – all these assets are generating revenue for their issuers / managers – but they are technically not counted for super fund fee purposes.

If you are a vertically integrated player which issues these types of assets as well as the super fund, you can collect the revenue somewhere other than the super fund, and hey presto – you have a zero cost super fund.

You can create a low or even zero cost platform in a similar manner.

Instead of charging fees in the platform, you collect them in the products listed on the platform – either in your own investment products (because you’re vertically integrated) or from external managers via revenue sharing arrangements.

This is not a new idea. In Australia, external fund managers have often rebated significant proportions of their revenues to platforms – some platforms pass these on to investors, but most don’t. It would be a relatively short step to more formal revenue sharing, which effectively pays for the platform.

This form of rebate is explicitly permitted under FoFA, provided it reflects bargaining power, as opposed to being a shelf space fee.

It’s also a less radical idea than it first appears. It is, after all, essentially how Woolworths and Coles get paid.

This business model is well developed in the UK, where there are successful D2C platforms offering a low or zero platform price to investors. In this case, the platform generally takes 50% of the fees charged by funds listed on the platform (UK platforms remain largely fund centric at this time).

Ironically, the UK’s FSA (equivalent to ASIC) has flagged banning this form of rebate, which may force some platforms to restructure their business model. It might only be a matter of time until this type of rebate is looked at again here.