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Mar 22 2015 at 12:49 PM | Updated Mar 22 2015 at 7:49 PM
Wealth management the next frontier of disruption
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Australia is one of the highest cost providers of managed funds in the OECD, according to the Murray financial
system report. Jessica Shapiro
by James Eyers
As peer-to-peer lenders nip at the heels of banks' personal and business loan books
and a bevy of global tech giants and local start-ups attempt to muscle in on payments,
the next frontier of technological disruption in banking is wealth management.
The opportunity is a move against investment platforms, which have been a major
boon for the institutions that own them. The big four banks, Macquarie and AMP have
spent hundreds of millions of dollars building platforms in their wealth management
divisions – which comprise more than 80 per cent of the financial planning industry –
to allow clients to access managed funds and other products. The platform market
has grown to more than $332 billion, according to Investment Trends, with 74 per
cent of new money invested by financial advisers placed via a platform.
But platforms are a locked-up, closed shop, unbefitting of the new digital economy's
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openness and transparency. Access to these proprietary technology systems is tightly
controlled by the banks, dealer groups and superannuation funds. It is a classic
example of bundled product: investments, administration, broking, trustee services,
cash management, product distribution and asset consulting are all on a platform
investment menu.
All these bells and whistles come at a high cost: institutionally-owned platforms
roughly charge between 50 basis points and 70 basis points in fees of assets under
administration.
The financial system inquiry chaired by David Murray was critical of high
superannuation costs. Australia is one of the highest cost providers of managed funds
in the OECD, the report said, despite Australian having the highest managed fund
balances in the world. These costs can be partly explained by high transaction costs
from the bundling of advice, trading and platforms.
Enter Mike Ghenta, a former McKinsey consultant who says the current managed
fund distribution model is broken and primed for digital disruption. An American
resident in Australia for a decade, Ghenta says two new technological developments
over the past year will radically change the way in which financial advice is delivered.
The first is the Australian Securities Exchange's new mFund Settlement
Service, allows any consumer with a broker to buy and sell managed funds directly on
the ASX in the same way and for the same cost as they buy and sell ASX shares,
without having to use a financial planner or a platform.
The second development is the arrival of "robo advice", where computer
algorithms help determine investor risk tolerance and decide on asset allocation that
are implemented in an automated, low cost process.
Ghenta says mFunds has the opportunity to disrupt the way managed funds are
offered in Australia by unbundling advice, distribution and trading by providing a
much more effective distribution model to one of the most popular investment
products in Australia, being managed funds, at a significantly lower cost. For fund
managers, it opens up a new distribution channel and can provide a lower cost
compared to platform distribution. There are also efficiency gains from the
automated ASX processing.
Trading on mFund began 10 months ago. The ASX is not making its transaction
volumes public. There are now 77 funds managed by 23 fund managers on the service,
including offerings from AMP, PIMCO, Aberdeen, Platinum, UBS, Lonsec
Stockbroking, Bell Direct, CMC Markets, Baillieu Holst, Burrell Stockbroking and
Pershing Securities are all linked into mFund but the ASX says two-thirds of all
transactions are originating from financial planners, suggesting the brokers are
largely feeding wholesale clients into the service rather than targeting retail clients
with a direct offering.
Despite the establishment of online equities trading websites to link retail investors
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with the stockmarket, when it comes to mFund, the big four banks are all sitting on
the sidelines. Ghenta says this cannot be surprising given the incentives in the
vertically integrated banking model, where banks seek to sell wealth management
services to other customers, and the incentives – including platform fees – which are
built into the system. "By adopting mFund, banks also risk cannibalising their existing
financial planning clients," he says.
An engineer turned investment banker, Ghenta has an impressive track record in the
markets. He was on trading desk of First Boston during the 1987 stockmarket crash,
and rode the dot com boom at Doubleclick (now part of Google). He had an eight-year
stint at McKinsey, where he worked alongside Adair Turner, now chairman of the UK
Financial Services Authority, restructuring the Romanian banking system after the
collapse of Communism, and with Roger Ferguson, the ex vice-chairman of the US
Federal Reserve. He also launched the first online trading platform for private clients
globally under Jamie Dimon at Smith Barney.
After moving to Australia in 2004, he working with the Grattan Institute's John Daley
at eTrade and was chief executive of Rockwell Financial, a private equity firm, which
he left earlier this year to pursue a launch of a company that provides "affordable
managed funds to the masses", as he describes it. "I see a significant opportunity for
this in Australia, given the structural inefficiencies of our financial advice industry,
some of which have been highlighted in David Murray's FSI report."
David Murray found in his December report that "the high concentration and steadily
increasing vertical integration" in the wealth management sector "has the potential to
limit the benefits of competition in the future". Restoring trust in the financial advice
industry will be a key theme of the annual Australian Securities and Investments
Commission Forum in Sydney, which begins on Monday and concludes on Tuesday. It
also comes as the Australian Prudential Regulation Authority sent a letter to
superannuation funds last week warning them that management of conflicts of
interest in superannuation needed to be improved.
But perhaps the more ominous for banks' wealth management operations is not the
focus of the FSI on advice in particular but technology in general. Ghenta met on
Friday with inquiry panel member Craig Dunn, who is also the new chair of Stone and
Chalk, a hub for fintech players that is being built in Sydney at Level 26, at 45 Clarence
Street. Dunn encouraged Ghenta to move into the incubator, which may also attract
start-ups working in robo advice.
When mFund is overlaid with a robo advisor, Ghenta says his model becomes even
more powerful – as the robo advisor automates independent research at a low cost.
Under this model, computers are programmed to trawl thousands of sources and can
determine when fund portfolios might be rebalanced, to account for changing
personal circumstances, asset allocation recommendations or changes in fund
ratings. The automated process addresses concerns about vertical integration,
including conflict of interest and the cost and quality of advice, issues that have
plagued the industry.
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Investors with super portfolios under $100,000 would have the most to gain from
accessing managed funds directly via the ASX given, Ghenta says, given they are not
large enough to provide diversification through individual holdings, while the quality
of advice for small portfolios is variable and fees are relatively higher. It could also be
compelling for nigh net worth investors and self managed superannuation funds.
He also reckons offshore players would be scouting for opportunity in the space; their
potential arrival would put banks and dealer groups on the back foot given their
recalcitrance at becoming early movers.
