For any industry sector to stand firm amid the worst financial downturn in 70 years is impressive.
For the same sector to experience financial gains within such a downturn is significant.
Australia's platform sector has emerged relatively unscathed following the global financial crisis (GFC).
While investors have ducked for cover since October last year, shifting their funds to safer ground in cash investments, Australia's platform market has continued to swell.
The industry's big hitters, Colonial First State, Macquarie, BT, MLC, Asgard and Aviva, have all seen billions of dollars in inflows invested across a plethora of cash offerings.
Impact of the downturn - inflows
"Probably the most outstanding feature of the platform market over the last 12 months would be just how much the platforms have attracted in terms of flows into bank products - term deposits and cash," Colonial First State distribution general manager Paul Barrett says.
"If you look at the major platforms, and if you look at ours, we've taken somewhere close to $3 billion in terms of cash across our term deposit-style products across our platform suite during that period, and it was something that two or three years ago you would never have predicted."
For Barrett, the inflows during such tough markets were a result of high interest in FirstChoice's term deposit offerings.
"It has propped up the platform flows. So platform flows across the year have been okay because they have been well positioned to accommodate the flight to safety, which is obviously consumers opting out of more risky asset classes," he says.
"That said, we saw a major swing in June back into equities across our platforms. It's still not back to the heyday of equity flows, but in the first time in seven months we saw a move into equities again."
For Aviva, the market downturn has provided surprising results for its Navigator platform.
"We've actually had a pretty pleasing outcome in terms of relatively minimal redemptions, but obviously with lack of confidence in investment markets it's been a challenge for many in attracting new business," Aviva distribution development manager Stuart Fechner says.
"Since early on this year we have seen a bit of a shift in relative dollars between term deposits and cash, which throughout the second half of last year was just overwhelmingly flooding into that space. That has certainly pulled back from its heights and equities are slowly but gradually picking up its shares again."
BT Financial Group agrees, with the firm's wrap offering experiencing net inflows throughout the GFC.
"It is probably one month where it has been dubious, but in total we've had more money come in than we've had go out at that time. That has been great," BT Wrap product and strategy national manager Craig Lawrenson says.
"We accrued up towards $2 billion of term deposits between April last year and now in the peak of the GFC."
In the case of Asgard's eWrap, the firm's inflows have held steady.
"Obviously the growth that we had experienced in 2007 hasn't been seen in the past couple of years, but one of the things that has remained fairly steady is the outflow level," Asgard Wealth Solutions senior product manager Kelly Power says.
However, for MLC and Macquarie, the financial downturn has had a negative impact on their platform inflows.
"There has been an impact to the inflows into the platform industry and MLC. Entirely as you'd expect, given what financial markets, equities markets have done," MLC & NAB Wealth investment platforms executive general manager Michael Clancy says.
"There's certainly been an impact to inflows. Outflows have actually been much better than we'd have planned, so there been a significant improvement in that area.
"Inflows have really picked up again over the last few months so I think our experience over the last nearly two years now really has been entirely what would be a commonsense expectation, given what's happened in the markets."
In Macquarie's experience, the past 12 months have been pretty consistent with the rest of the market, to a point.
"Our funds under administration have been impacted by the downturn in investment markets," Macquarie Wrap head of product Doug Chang says.
"In our case, because we focus a lot on direct equities administration, we probably had a little more impact from the downturn in the Australian equities than other platforms in terms of funds under administration, but in terms of inflows we are pretty consistent with the industry."
Impact of the downturn - outflows
Perhaps the most interesting change in the past 12 months has been the low outflow levels from the platform sector.
"There has been record levels of switching activity inside the platforms, so a lot of people switching into cash from high-risk investments," Barrett says.
"The actual level of outflow hasn't moved too much.
"It's been more a case that growth into platforms has slowed up a bit. You have had some new growth in the cash phenomenon that I mentioned, but a lot of activity has been switching."
Power says at the beginning of the GFC, Asgard was concerned people would pull their money out of platforms, though this has not happened.
"The redemption rate has stayed completely stable and what we've more seen is movement in asset classes, obviously to cash assets, but we have seen a drop off in inflows, particularly in the quarter up to December 2008, so we dropped a fair number of points in terms of our share of net industry inflows, and that's largely just because of the drop in investor confidence and just general investor sentiment issues," she says.
"In terms of money flowing out of the platform, that hasn't really happened. What we've seen is money moving around in the platform, so obviously a lot of money going to term deposits. I think we're up to $1.5 billion sitting in term deposits."
According to Clancy, in the case of MLC, switching levels have been moderate.
"We certainly haven't seen a wholesale shift in assets from the traditional balanced and growth-type diversified portfolios to very defensive assets. There has been a modest shift," he says.
"When investors were very nervous we did see some shift in inflows that were coming in going into more defensive investments, but then again over the last two or three months as inflows have started to increase again we have seen a return to what would have been a pre-global financial crisis pattern of investments into defensive growth portfolios."
He believes financial advisers are the key driver for MLC's return to pre-GFC investment patterns.
"I think advisers have done a very sound job of keeping their clients focused on their long-term goals. Equity markets are volatile and we should never wish away the volatility from equity markets, because if you wish away the volatility you wish away the good returns as well," he says.
Competition
While the platform sector is in a relatively good position, competition from rivals and third-party investment vehicles, such as separately managed accounts (SMA) and exchange-traded funds (ETF), is heating up.
For Praemium's chief executive Arthur Naoumidis, the SMA market in Australia has started to pick up.
"The change in the market sentiment around adviser commissions, for example, is actually pushing advisers to having a wider set of products," Naoumidis says.
"I think you'll find some platforms will grab it by the throat and go for it; others will think just saying we've got one is enough. The reality is that it's going to surprise people how quickly the SMAs are going to grow now."
Praemium has had a mixed experience with SMAs in the Australian and international markets.
Last year, the firm made its push into the United Kingdom market.
Praemium signed up a number of UK-based firms, however, a few months ago had to scale back its offshore operation due to poor markets.
The scaling back project meant redundancies for Praemium's UK office as cost-cutting measures were put in place.
"We launched in September last year just as the market in England was tanking," Praemium says.
"We are finding ourselves [back] in the English market. In the last three months we're getting inundated with interest. So we are really excited."
In December last year, Aviva announced its intention to add SMAs to Navigator.
"Fundamentally we think that the structure and flexibility for the advisers and clients that an SMA structure offers does have real merit I guess compared to the dominant structures used at the moment, being managed funds or direct shares," Fechner says.
Aviva's decision to include the SMAs on the platform was not a short-term opportunistic move, he says.
"It is really something that is a strategic initiative that is going to be there and play out for many years to come," he says.
While SMAs have been available in the Australian market for a number of years, with a number of fund managers using SMAs internally, Aviva is one of the first fund managers to make a strong push into the space.
However, despite Aviva's move, the company has found that like many who believe in the SMA model, traction in the marketplace is difficult to come by.
"It was really a mix of views or response from fund managers from one end of the spectrum to another," Fechner says.
"Some [were] saying 'yes we like the SMA structure, agree that it has great merit, it's something that we can do with relative ease within our teams and structure, yes we're in and we'd love to participate' and there were others that said 'we've thought about SMAs, in this point time it's not a path that we want to go down or participate in'.
"By and large the main underlying reason for that was just the absolute transparency that is and exists within an SMA that the fund managers' intellectual capital, being their stock picks and their decisions, is visible every day."
Aviva has faced a similar reaction from financial advisers.
"I think for advisers fundamentally a lot probably just didn't know about SMAs because they almost weren't about in the retail marketplace," Fechner says.
"I know they were available but they weren't mainstream and it wasn't easy for advisers to access or use SMAs in normal everyday client portfolios. And while that's the case, it's really an uphill battle for them to get traction, and that's the sort of fundamental thing that we will be able to change from what we're doing."
New data from research firm Investment Trends supports the mindset of advisers towards SMAs.
"What we're seeing is really a few more advisers saying 'look, I advise clients on SMAs a little', so there is a slight increase in the number of advisers who talk to clients about SMAs, but it's still a very small proportion of new client inflows going there," Investment Trends principal Mark Johnston says.
"It really hasn't increased over the last couple of years. So SMAs and IMAs [individually managed accounts] collectively are still less than 3 per cent of new inflows and they are not so far showing signs of increasing as a proportion."
Lawrenson says the lack of appetite for SMAs has halted BT's foray into the SMA space.
"On the SMA side I think the scoreboard shows that they haven't been that successful locally," he says.
"I've got a pretty strong view that SMAs are traditionally an Aussie equities-focused solution, and when you think about the average advice customer they have a much more diversified portfolio than just pure Aussie equities.
"So its difficult to get that diversification with an SMA, and what we are seeing and what we're moving towards is having SMAs on the platform so they become an alternative to a direct equity play and a managed fund play; they are the third prong in the Aussie equities space."
However, the idea of SMAs is not something BT has completely rejected.
"I think platforms in general can support greater distribution of SMAs because it complements what we do. We are already administrators of assets and of course we administer assets across every element of the sector, from cash all the way to international equities, so SMAs complement that strategy more than they do as a stand-alone product," Lawrenson says.
In Power's view, SMAs are going to be a sizeable part of the market, though ETFs may push past SMAs in terms of demand and popularity.
"I wouldn't call it a huge part. I think it's going to sit nicely alongside managed funds and cash and direct Aussie equities as another asset class to complement the existing asset classes," she says.
"I think ETFs are in the exact same category. They are not really going to be a threat to our industry; they are going to complement our industry."
However, outside of competition, new investment vehicles in general that boost confidence around investing are a positive for the industry and for platforms, she says.
"I think that these types of investment vehicles are really important. Take ETFs for example. All the market movement indicates they are going to be popular. They give great exposure to some foreign stocks that you couldn't access otherwise," she says.
"So all those things make them really important and as an open architecture platform we have a responsibility to allow our advisers to access those."
For Barrett, the SMA space is definitely one the industry needs to keep contemplating.
"SMAs do provide some benefits to investors that are attractive. I think advisers are still assessing how an SMA would work in terms of the advice process and then operational requirements for a practice to successfully run an SMA. I think there are still some questions that are being asked there," he says.
"As advisers become confident that SMAs meet the particular need of a client that they have or that they want to have and that they can actually build an advice process and an administration process around that ensures efficiency, then you'll start seeing some traction.
"We're certainly seeing demand in our conversations, particularly with the white label customers we're seeing some demand for the SMA functionality."
Barrett is also seeing demand for ETFs due to their low-cost structure.
"When you go through periods of global financial crisis like this one and revenues fall, clearly costs become more of a focus," he says.
"Therefore products that are lower cost become more attractive. So expect to see more impetus behind things like ETFs and index funds and fundamental index funds."
Macquarie is also seriously looking at the SMA space.
"Through our platform at the moment we don't [provide SMAs], but certainly have been looking at doing something in the SMA space," Chang says.
"We actively talk to our clients about what their expectations are. We are actually getting quite varied responses in terms of how different advisers view SMAs, so we're just looking at the best ways of making them available through the platform."
On the other hand, MLC has taken a more direct approach to SMAs.
In June, MLC's parent company, National Australia Bank (NAB), informed the market it had purchased Aviva's wealth management division, including Navigator.
"SMAs have been around in the Australian market for quite a while although they haven't had a huge amount of take up," Clancy says.
"Our view is that we are all for innovation in the market, and to the extent that there are certain organisations out there who are launching SMAs. It will be very interesting to see how the current crop of SMAs go compared to the previous crop.
"We're in the process of acquiring Aviva. That deal isn't done yet but Aviva recently launched an SMA on the back of their Navigator platform and we're delighted with the innovation that the business is innovating."
Consolidation
In the past 12 months, Australia's platform industry has undergone much consolidation.
As well as NAB acquiring Aviva, BT and Westpac merged and Colonial First State revamped its parent company Commonwealth Bank of Australia's platform, Avanteos.
In the instance of BT and Westpac, both firms have publicly acknowledged the BT Wrap and Asgard eWrap offerings would remain as separate entities. It seems this is still the case.
"It's basically business as usual. There has been some larger structural change so that we're all reporting through to the super investments solutions division," Power says.
"So there has been a lot more collaboration and information sharing, but in terms of operation of the platform it's largely business as usual.
"We run a very discrete business. We have very different client bases; there is very little cross over."
In regards to NAB and Aviva, decisions over whether the group's individual platforms will be combined have not yet been made.
"It's really too early to tell and I guess there are many decisions that are being looked at and thought about, but at the moment it's just business as usual for us. So no change at all," Fechner says.
"Whatever a change is at any level, people like to have sort of assurance about the future, so at present that's really where we are at; we're doing the same things with the same people and the same relationships."
Clancy echoes Fechner's comments: "The deal has not been done yet. We are in the early stages of planning on pulling together teams to work on design.
"If we receive regulatory approval, then in time those design teams will answer that question."
As for Colonial, the firm has leveraged off the Avanteos brand and incorporated it into its new platform offering, FirstWrap.
"It became obvious to us that Colonial First State needed to have a strong presence in the wrap market," Barrett says.
"We had leading technology and administration capability in Avanteos, so it just made complete sense to us to leverage that opportunity and obviously to leverage our brand and our distribution capability and our product management capability.
"We want to compete on a flexible rich function platform that can accommodate a far broader set of products and choice for more sophisticated investors."
SMA concerns
However, while the market may be taking more of an interest in SMAs, there are a number of SMA-related issues that need to be solved if they are to gain traction.
"There is still a little bit happening on the supply side though; it is still fairly early days in that some of the platforms are beginning to offer this," Johnston says.
"Traditionally one of the big barriers for SMA adoption has been not having the SMA available on platforms, not having it wired into planning software, so as some of these barriers are resolved potentially that could lead to an increase, but it's still too early to say that's happening."
Barrett says one major concern many fund managers have is protecting their intellectual property (IP).
"The other SMA-related issue is who is the underlying manager going to be? Are they going to be small start-ups? Are they going to be big institutional managers who are prepared to go down the SMA route potentially giving more transparency to their IP? There are a number of issues that need to be resolved before you're going to see a mass market approach," he says.
Fechner says fund managers are still coming to grips with the transparency of SMAs.
"So there's no time lag or hiding of what you're investing in, it's just there and it's visible. That's something that a number of fund managers are still coming to grips with," he says.
Fee debate
Another issue for the platform market is fees.
Much debate has surrounded the issue of commissions versus fees in the general advisory section of the financial services space. While no official flow-on effects have been felt, any decision to abolish commissions will no doubt impact on the sector.
"I've been having a lot of conversations in the market about this and there is a general acknowledgement that a move to a situation where the fees are negotiated between the client and the adviser is the way forward," Barrett says.
"That doesn't mean that you can't charge asset-based fees, but it means the key principle is that the client is not getting serviced and they can opt out of getting that fee. Advisers accept that and acknowledge that's the way forward."
In Clancy's view, as Australia's platform industry is well established, there will always be pressure to move with the times.
"The platform industry is now a well-developed industry. It is not a new or certainly not a fringe part of the market and as an established part of the industry I think the pressure is always on to provide more benefits, provide more services and provide more differentiated product and do so less expensively," he says.
"And so there's no new pressure on us to provide more and cost less now than what there normally is. But we believe that is where the market will trend in time."
In Chang's view, it is too early to comment on the impact a change in remuneration will have, though it is best to remain vigilant.
"We're watching all the developments and reviews very closely and talking to industry bodies on it, but I think it's pretty early at this stage to say what the outcomes will be," he says.
There is no doubt the next 12 months will indeed bring much change to Australia's platform market. While it is unknown whether SMAs or ETFs or further consolidation will dominate in 2010, the fact the big players are willing to at least consider options leaves them in a pretty strong position for growth and survival.
