How platforms can take on SMSFs

Last week we proposed a simple but effective regulatory response which would eliminate some of the more extreme investment practices being seen in SMSFs. Adopting the UK SIPP “taxable” property concept would have four key benefits:

– Eliminate a range of dubious and / or high risk strategies involving residential real estate and personal / business assets.

– Protect SMSF members from the catastrophic losses we have so often seen when exotic assets and gearing are combined.

– Protect the Commonwealth’s tax expenditures on super – we have an interest in seeing such “expenditures” being used appropriately, or they may be further scaled back.

– Levelling the competitive playing field.

Dealing with this unfinished regulatory business is a necessary measure, but clearly insufficient in terms of competitive strategy for platforms. As collective arrangements, platforms (whether not-for-profit or commercial) need to recognise that competitors promoting SMSFs are doing a couple of things particularly well:

– They are tapping into genuine changes in member preferences and behaviour, and responding to those changes far more effectively than the collectives.

– They are marketing a clearly differentiated value proposition and communicating its benefits effectively (even if those benefits are exaggerated, and the costs and risks often ignored). By and large collectives have been silent in contesting this proposition.

As a result, SMSFs are BBQ conversation in a way that few collective investments of any sort have ever managed.

We have a classic marketing strategy problem here – a changing market and a disruptive competitor. It’s a particularly tough situation for incumbents with a back-book / front-book situation.

Sensible commercial responses depend on your situation.

First of all, are SMSFs really a problem? They need to represent enough of a problem to justify the potentially large investments involved in responding. That won’t be the case in every instance.

However, for larger mainstream platforms, SMSFs likely represent an increasing drain on asset growth – impacting revenue for retail competitors, and scale benefits for the not-for-profits, as well as challenging the trustee’s business strategy.

The goal of any response should be to re-draw the market boundary line where the benefits of platforms fade out, and where the benefits of SMSFs should fade in. While SMSFs clearly have their place, that boundary line has arguably advanced too far.

Platforms need to think about how they can deploy the benefits of scale.

SMSFs are an artisan competitor – small, flexible, but still expensive. Platforms are mostly large incumbents. Being large has lots of disadvantages – think slow and lumbering – but there are also advantages to scale, particularly the ability to make the big investments needed to drive down costs and develop and commercialise new products and propositions.

Platforms will also need to innovate with respect to advised and direct customers. Although many retail platforms have large investments in advised distribution, in a post-FoFA world they need to release the shackles of channel conflict and make great propositions available to both advised and direct channels so that investors can choose how they want to interact.

One reason for the rise of SMSFs is that hardly any decent direct platform offers have been available. If you wanted a more engaged experience, and didn’t want to use an intermediary, where could you go other than an SMSF?

For platforms, we like the example of CommSec, which wreaked havoc on another artisan industry. CommSec is a platform too – a trading platform. It doesn’t offer every feature of a traditional broker, just as platforms will never offer all the flexibility of an SMSF (and nor should they).

But CommSec delivered most of the standard features, developed new ones, delivers its proposition on an industrial scale, and at a price about 80% lower than what previously prevailed. CommSec took an artisan offer to the mass market, and that is the guts of what platforms need to do here.