AQUA II can’t come soon enough for managed funds

Where is AQUA II?

It’s a question we get regularly, and we’ve given up putting a date on it, having expected it to be launched a year ago. It’s becoming a bit like Elvis sightings – no-one seems to have any confidence in when it will appear and it risks becoming a bit of a joke.

Which would be a great pity. Notwithstanding that the ASX has maintained its record over many years of raising the expectations of the managed funds industry, only to subsequently dash them, AQUA II is really needed.

Let’s recap on what AQUA II is. AQUA II allows a fund manager to outsource its registry function to the ASX and to conduct trading in units via the ASX, rather than paper. The potential in terms of efficiencies and connecting to customers is huge. You can read about AQUA II in detail here: http://www.triapartners.com/resources/documents/12-12-14_06_Dimensions%20March%202012%20-%20AQUA%20II.pdf.

Fund managers see the possibilities in terms of reaching SMSFs and opening a new retail channel. All true. But an equally compelling reason is sheer investor experience. Have you tried investing in a managed fund lately? It’s not easy. And for an investor using an SMSF or family trust – a common situation – it’s a nightmare.

Let’s compare the investor experience between buying an ETF v buying a managed fund directly.

ETF

– Fire up your broking account (or establish one, but most investors already have one).
– Research the exposure or outcome you are looking for on ETF issuer websites.
– Ensure you have enough credit in your account.
– Place trade.
– Receive confirmation of trade and price within minutes.
– Done.

Pretty easy stuff. Admittedly ETF issuer websites could do with more work – heavy on technical information and rather short on investor benefits. But if you can trade a BHP share, you’ve got ETFs down pat. It’s fast, efficient, and all online.

Managed fund

– Find the fund you are looking for on the manager’s website, do your research.
– Download PDS.
– Download customer ID forms for anti-money laundering and counter-terrorism financing.
– Download application forms.
– Print forms (some allow populating forms online but you generally still have to print).
– Complete customer ID forms.
– Detail beneficiaries if a trust.
– Verify ID of trust via copy of trust deed certified by a lawyer, accountant, JP etc.
– Verify individual IDs if individual trustees.
– Detail directors and shareholders if a corporate trustee.
– Verify ID of corporate trustee via certified ASIC registration copy or database search.

By this point we have not yet actually started on the application form! This is marginally easier:

– Provide investor details.
– Provide TFN details.
– Select fund.
– Nominate distribution details.
– Provide authorized signatories.
– Write cheque for initial investment.
– Mail completed forms and cheque to fund manager and pray you got it all right.
– Receive confirmation of trade and price a week later.
– Done (at last).

If you are investing in say 3 different funds from 3 different managers, you are doing this process 3 times over, probably in 3 different formats. Could you blame prospective investors for thinking that it might be a great fund, but frankly it’s all too hard – if I want a diversified exposure, I’ll buy an ETF instead.

Of course when you set up a broking account you have to go through much the same ID processes. But this is something which many investors have already done, and you only have to do it once. The other way you could mitigate the drama is to use a platform, where you similarly just need to go through the pain once. That’s fine if you have a financial planner, but less viable for the self-directed investor given the dearth of platform offerings targeted at them.

As we touched two weeks ago, investors are busy, time poor people. You have to make the experience simple, easy, and fast. ETFs are all of those things (ok most). Managed funds are none. AQUA II won’t solve all the issues, but it would be a big step forward which might see more applications make it further than the printer tray.