Why are platform prices falling?

11-11-18_52_Trialogue chart 18 Nov 11 value chain

MLC’s announcement of reduced 2012 pricing structure for Masterkey Fundamentals is a reminder of two strong trends in retail wealth:

Falling prices for platforms.
Intense competition for platform business before FOFA commences.

At the Tria Strategy Breakfasts in October we described how the role of platforms as a tollgate in the retail industry’s prevailing business model is being eroded by regulatory change, competition, and technology improvements. MLC adds yet another data point to this view.

Several forces are pushing platform prices down. FOFA forces the unbundling of product fees and commissions, so prices of go-forward retail products have gapped down. FOFA has also hit the independent planner channel hard, and platforms serving that channel have been repricing aggressively. Macquarie Consolidator is a good example, but there have been other price initiatives from Asgard, IOOF, and others.

Repricing has typically been a combination of outright reductions across a tiered AUM scale, dollar price caps, and occasionally rebates or family based pricing.

It’s clear that the days of the platform component of the value chain earning 50-70bps are over, for new business at least. While some speculate about platforms being given away for nothing, it’s more likely that we are heading for a new range of 10-40 bps, with a median of 25-30 bps. We are not there yet.

So the pricing power of the platform tollgate is under a lot of pressure. The vertically integrated players remain best placed to resist, but even here it will be a case of slowing down the incoming tide as much as possible, rather than holding it back.

The price challenge is being compounded by erosion of the volume power of platforms. Improvements in adviser desktop software and wealth management technology are making it increasingly possible to dispense with a platform altogether in favour of a somewhat clunky but “good enough” off-platform solution.
The urgency of repricing is being driven by the sales opportunity which exists through to the 1 July 2012 start date for FOFA. FOFA effectively grandfathers existing retail business and discourages planners from moving the business around after that date. It may create a lock-in effect, which means that higher margin existing business only gradually runs off .

With many planners reviewing which platforms they want to have their retail business located on, it’s a rare and limted opportunity for platforms to win chunks of market share from competitors.

Overall though, it’s hard to avoid the conclusion that Australian platforms are past the peak of their market power in terms of both margins and share of planner sales. The SMSF challenge also remains largely unmet (although reduced prices will form a part of that response). Platforms will remain a dominant part of the industry landscape, but are also vulnerable during its most significant re-ordering in 20 years.

Posted In: Trialogue