If you build it, will they come? What can Australia learn from the UK’s D2C wrap platform market?

The Australian and UK wealth markets have a lot in common…

• Retail platform markets which are both roughly A$600b in size
• Both now have compulsory defined contribution employer funded pension/superannuation saving systems¹
• Both have large and mature financial advice industries (albeit UK licensees are far more independently owned; this point becomes important further down)
• Both have been through similar significant regulatory overhauls of financial advice and product in recent years (FOFA and RDR)
• Both have relatively high levels of direct share ownership, due in part to a series high profile public floats

…..and yet in one important aspect our wealth markets diverge. Unlike the UK, Australia has not developed a meaningful direct to consumer (‘D2C’) wrap platform market.

For many years Australian technology suppliers have been at the forefront of platform functionality and innovation. Praemium, Bluedoor and Bravura are all examples of local technology players who’ve expanded overseas and helped create a global reputation for Australian wrap platform innovation. While financial advisers in the UK took a little longer to shift to a platform-based model, they are now heavy users and write the bulk of new business on platforms.

However most interesting for our Australian readers, has been the rise of a true direct-to-consumer (‘D2C’) wrap platform market in the UK – dominated historically by one disruptive market leader; Hargreaves Lansdown and their Vantage Wrap (www.hl.co.uk). Other players like Fidelity UK, Alliance Savings Trust and BestInvest are now starting to gain market share as well. These platforms directly target the engaged and confident DIY investor reading the Financial Times; consumers who have actively bypassed financial advisers. An intuitive customer-centric interface, discounts & promotional offers, online application forms, full page spreads in newspapers and online tools have helped Hargreaves Lansdown reach a staggering ~A$85bn in largely self-directed FUA and become a relatively well known household brand in the UK.

So why has this happened in the UK and not Australia? It’s a combination of factors:

First, fear of channel conflict by the dominant retail platform players has created a lack of supply – providers simply haven’t designed or offered wrap platforms direct to customers. The early adoption of platforms by advisers in Australia has been a double-edged sword. While they delivered large amounts of FUA, the fear of upsetting this channel held most platforms back from developing a D2C offer. This issue is compounded by Australia’s high levels of vertical integration and ownership of advice dealer groups by platforms.

Hargreaves in the UK was originally a D2C-only wrap provider and had no advice channel to disrupt. While other UK adviser-centric platforms are now moving into D2C have faced issues of channel conflict, the lower levels of vertical integration have arguably made this move easier.

Second, a stronger direct marketing wealth & asset management culture in the UK – The UK has a non-pension tax effective savings vehicle – the ISA – which allows savers to invest up to £15k (~A$30k) per annum tax free. Platforms and asset managers have gradually become more adept at selling these products direct to customers, often without an adviser.

There is also stronger evidence of a ‘star fund manager’ culture in the UK– with names like Neil Woodford having strong name recognition amongst DIY investors. In contrast, there aren’t many retail wrap platforms and asset managers in Australia that regularly advertise on billboards, taxis and buses.

Finally, off-platform SMSFs have become the dominant alternative in Australia – A significant proportion of the A$600bn SMSF wealth segment is self-directed – evidence that there is no shortage of potential demand in Australia for D2C wealth solutions. In arguably one of the greatest missed opportunities in wealth management history, consumers have been faced with no viable fully functioned D2C super wrap solution. And so, a vast sum of money left the collective super system and found a solution largely outside of traditional platforms (we estimate that less than 10% of SMSF FUA is on traditional wrap platforms).

There is evidence that a D2C Australian wrap platform category will emerge – but will it have the success seen in the UK?

It’s early days and FUA is very small, but a new category is beginning to emerge. Major retail wrap providers (eg BTFG’s Panorama) are in the process of developing D2C platform offers and workplace distributed not-for-profit providers (eg AustralianSuper MemberDirect) have developed partial wrap-like solutions. Non-major bank aligned players have also been tempted by the prospect of tapping into the D2C market, and are creating online DIY solutions (eg ING Direct Living Super).

The $64,000 question – is it too late? Have off–platform SMSFs become the dominant D2C alternative for this class of engaged DIY investors? Can existing self-directed SMSFs be coaxed back on to wrap platforms and potential new investors convinced of the value proposition?

A key factor will be how successful traditional Australian platform businesses (or new disrupters) are at developing D2C acquisition, servicing, support and trading capabilities – while remaining profitable and not alienating their advised channels.

While the opportunity is potentially very large, players should not underestimate the fundamental cultural, IT and marketing transformation a successful D2C proposition requires. Hargreaves Lansdowne is often described as having more in common with the direct marketing capabilities of Time Life than a traditional wealth business.

While the UK platform market may not have led the world in technology, there are a number of players well and truly at the forefront of D2C platform acquisition and propositions – this market offers a fascinating case study for Australian platforms considering this shift and a chance to leverage many years of unique and valuable experience.

¹ The UK’s only become compulsory recently, however large sections of the UK workforce have received pension plans from their employers historically