At the 2023 Morningstar Investor Conference, Morningstar's Director of Research and Investment Products, Rick Di Cristoforo, hosted a panel with leading platform providers, Jason Entwistle, Executive Director of Strategic Development at HUB24 and Peter Labrie Executive Director at Colonial First State’s FirstChoice. This is an edited transcript of sections of the discussion.
Rick Di Cristoforo: Jason, what are the key trends in portfolio management that platforms are seeing and how are you responding?
Jason Entwistle: The key trend in portfolio management is advisers are doing less of it. In the past, there was a big focus for advisers on research and portfolio construction and the trading tools platforms provided. We're increasingly seeing advisers engaging longer with their clients on broader strategies and financial advice, and leaving the implementation, portfolio construction and rebalancing of investments to the automated tools platforms offer.
Rick Di Cristoforo: Peter, what are you seeing?
Peter Labrie: Very similar. There are more asset consultants implementing across portfolios, and we’re also seeing an increased focus on a core and satellite investment approach. It’s about getting the best out of the fee budget that people spend on investments, with indexing for some parts of the portfolio and then using that fee budget for more of the alpha-generating-type assets, such as private equity, private debt, concentrated equities, those sorts of things. And in a rising interest rate environment, a lot more focus on fixed interest funds, and platforms have a really good selection of those type of assets.
Jason Entwistle: At HUB, about 45% of our Funds Under Administration (FUA) is in managed accounts and probably 60% of new monies. Something like 80% of our advisers are using managed accounts in some way for efficient implementation of investment strategies.
There's a much broader question about platform business models. In my 30-something years in platforms, I've seen a 1 to 2 basis point drop in margins pretty much every year on average. Sometimes you get to a cliff, sometimes a plateau, but it's a scale game, and parts of the platform are a commodity.
Peter Labrie: Platform offerings depend on a scale perspective. We're in the process of launching a new Edge platform, and we've partnered with FNZ for cost and efficiency, and they're a platform provider that manages over $2 trillion in assets. So, it's massive scale using their underlying technology. Obviously, FirstChoice from our side has been a long and strong master fund, and there's a $400 million investment over the next four years to reinvigorate our core technology as well. We see that that focus on efficiency is super important from a platform perspective, and every basis point matters.
Jason Entwistle: Back 30 years ago, trustee services cost 10 to 20 basis points, and we pay less than 1 now for that same service. These things do become commodities. Platforms are focused on delivering a solution for clients, but we're not really solving the adviser's problem when we just focus on certain clients, because the adviser has two or three platforms and clients with other assets. So, if we're really going to solve the advice problem and help advisers to be more efficient and deliver a great experience, we have to solve more of the problem. And that means more technology. That's where it will go, and that's not so much a commodity business, that's about experience, that's about service, and it will really help advice businesses.
Rick Di Cristoforo: So to what extent are platforms digging into the actual advice delivery and process itself?
Jason Entwistle: There's a holy grail of the platform technology and the advice technology being the one and the same, and it all just works. It's not even an integration, it's the same thing. But I don't see it and I’ve tried to make it happen. But the reality is, Xplan, the leading tool in our market, with 20 years of development and a really broad feature set that is just so hard to replicate, and I can't see platforms going there. We will make it more efficient, integrate better, make the ecosystem work much better, but I can't see us building those tools.
Peter Labrie: The secondary platform used by advisers is increasing in importance, driven by the best interest duty and that one platform will not suit every client's needs. We also know that advice practices use something like 14 different pieces of technology, and then none of those advice practices all do it the same way. You can’t become a one-stop shop, you need a very open architecture and integrate out into various software providers. The platform is an enabler, to enable advisers to do their job more efficiently and more effectively. We're connecting with Xplan, AdviserLogic, Myprosperity, all those sorts of groups to minimise the time that an adviser spends on integration.
Rick Di Cristoforo: What do you see from an opportunity and potentially risk perspective that are on the horizon from the Quality of Advice Review?
Peter Labrie: We've seen the number of advisers in the industry decrease probably 40% over the last couple of years. We also know the cost of advice is going up because of the increased compliance. So, that's not a good environment when you think about mass Australia getting advice. If we continue on the current policy settings, only about a third of Australians will get retirement advice over the next 10 years. Now, retirement advice is incredibly complex. It's difficult to get a handle on across all of the things that are going on. We had one of my colleagues run a session with our extended leadership team the other day asking us difficult questions about retirement. And I tell you, for a room of experts, we didn't do very well. So we do have this advice gap, and QAR is a key component to simplify that advice process.
Jason Entwistle: Yeah, it's a sad state of affairs when something like 10% of Australians are able to get full service advice and afford advice, when every survey says that advice is a community good, ultimately people end up with better financial futures, and we have less reliance on the age pension. So, it is incumbent on us all to help solve that advice gap problem. QAR looks like a great step forward.
Rick Di Cristoforo: Do you think there's opportunity for platforms such as yourselves engaging with those sorts of entities that have, in the case of banks, been out of the market for five years, let's say, and in the case of industry funds have barely dipped a toe in to basically deliver into their work? So, could we help them?
Jason Entwistle: Yeah, possibly. They haven't rung lately, mate. I'm waiting for the call.
Peter Labrie: The industry funds are focused on this market, it's front and center when they're thinking about their clients going into retirement. Banks is a different proposition. We'll see how that changes over time.
Rick Di Cristoforo: Jason, how do you see platforms evolving to meet changes over time?
Jason Entwistle: In the past, we started from the backend, custody, execution, registry and investment books of record, all that stuff, and worked forwards towards the adviser and ultimately the end client. If we were starting today, you would start at the client and come down. The technology is so different now, and the clients expect digital engagement, you have to start there and work backwards. But we are where we are. The platforms we have today all started from the ground up. We are looking at how do you start to fashion the platform from the client experience backwards, supported by their adviser.
Rick Di Cristoforo: Jason, there's been a lot of developments in the asset space outside of the listed space or managed investment schemes, particularly unlisted assets or special assets. And it was an area that needed some work at the beginning of platforms. How are you handling it, and what are the trends you're seeing from the users?
Jason Entwistle: The last thing we want is advisers unable or unwilling to recommend an asset that is in the client's best interest but it's just hard and they can't make it work for their own business, their processes, because their platform doesn't support it. We need to be able to deal with any asset, anywhere, anytime, no matter how it's held. There's a lot we can do in custody, and platforms in the last few years have expanded the list, but we'll always get to the point where an asset doesn't suit being held in a pooled custody environment. Some of these assets, the ones with calls, for instance, they put the pool at risk. We've got to deliver that money. The client may not give it to us, and we can't put the rest of the pool at risk. So, there has to be an alternative model where if the adviser wants it, we can deliver the experience, the access, we do all the work, but it may not be held in custody on the core custody platform. It's essentially reporting, transacting, but not held in custody.
Rick Di Cristoforo: A key selling point for a platform is the size of the menu. What trends are you seeing on inclusions of products and how do you make those decisions?
Peter Labrie: For a start, there's a lot of regulation in this space, trustee requirements around what can and can't go on investment menus, particularly in the superannuation space. We go through that process before we add a fund to an investment menu. Then there’s ratings, support from advisers, understanding the portfolio management team, how long they've been there, the tenure, independent researchers such as Morningstar. Then it's really our engagement with the adviser. Where do they see the demand, how much support will it receive? It's finding that right balance between the cost in adding assets to the menu versus the demand that's coming through.
Rick Di Cristoforo: The focus has been on the basis point fee levels for platforms, and over time, there's been additional ways that platforms have been able to earn an income. Is it all still about the basis points?
Jason Entwistle: Rick, it's never been all about the basis points, but ultimately like any supplier/partner relationship, there is a fee, and we want to provide the service at the lowest cost we can. And our clients want to buy it at the lowest cost they can get it at. But ultimately, if you want a healthy partner, you want a healthy supplier, and you want us to keep investing in the service, in the technology for the long term, not just, let's invest for three years, squeeze the lemon and get out. You want this to be a business that's around for the long term. So we've got to have really mature conversations about fees. We've been able to share fantastic fee benefits with clients as we scale up and that will continue, but it’s also about the service, the ability to invest and delight our clients while giving us a reasonable margin so we can continue to do that.
Peter Labrie: Ultimately, it's about value for the services that you're providing, not necessarily the cheapest. Some people will opt for the cheapest service but we need a sustainable industry and it's not always going to be the cheapest provider that will prevail here.
Graham Hand is Editor-At-Large for Firstlinks. This edited transcript does not take account of the personal circumstances of any investor.