Platforms in 2012

We’re opening the year with some thoughts about platforms in 2012, given that our last Trialogue looking at Member Direct, AustralianSuper’s new direct-to-consumer super wrap, created enormous interest.

As we all know, the retail platform business model is under pressure from:

• A large and growing self-directed investor segment which is using SMSFs as its preferred vehicle

• Rotation by planners away from managed funds to direct assets (including equities and term deposits)

• Improvements in technology which are allowing planners to rotate away from traditional platforms entirely; eg by using XPlan or Praemium

Those pressures are most evident at the top of the market, but they won’t stop there. Already this is starting to erode traditional platforms’ and fund managers’ dominance of retail flows and assets, and ability to maintain pricing levels.

I saw this in action on a visit to a boutique financial planning practice in Brisbane just before Christmas. It was the industry’s worst nightmare – unhappy with platform costs and disappointed with many active managers, they are taking clients off traditional super platforms, setting up SMSFs, moving from managed funds to ETFs and direct securities, and using XPlan to administer the business.

The odd experience I had was with a major wrap provider. Having heard good things about their low-cost product, I called for a PDS (it’s not online as far as I could see). But as I don’t have a financial planner, I was refused a PDS and turned away. I am sure there are good reasons why this policy is in place. But given the way the market, technology, and regulation are changing, does restricting products to particular channels stll make sense?

If you take a long term view of the evolution of the industry, the business model is in transition. The dominance of the existing model is fading, but the dominant new model is not yet clear. This environment is particularly difficult for big players, and favours insurgents and innovators. But it will pass, so hang in there.

Clearly as an industry we have to change, and for starters 2012 should see more new low-cost super wraps offered directly, both by retail and not-for-profit platform players. Here’s why:

• You don’t want to give AustralianSuper too much of a lead. Pandora’s Box has been opened and the first mainstream direct super wrap is out there now.

• Channel conflict issues are reduced by FoFA. The removal of embedded remuneration has levelled pricing between the planner and direct channels. Fund managers and platforms should be less concerned about alienating planners when considering direct offerings.

• The customers are out there. It’s a niche segment but it controls a substantial percentage of super assets. They’re drifting to SMSFs, and the industry needs to recapture much more than it does at present.

• It’s not an “either / or” channel issue. Today’s direct customer may want advice tomorrow.

• For incumbents, “do-nothing” looks increasingly unattractive, even for those which also own distribution. Clinging to the old model, content that distribution is more or less forced to buy in-house product, used to be a fortress. But as pressures trickle down into the mainstream, that fortress could become a burning platform. It’s important to get on the front foot.

2012 needs to be about getting back in the game – regaining lost customers and restoring damaged confidence. There are many strands to this, but delivering quality, low-cost products to key customer segments, through whichever channels they want to buy, and with or without advice, is an important part of that journey.