Within the platform market, cash accounts, cash products and term deposits comprised nearly $31 billion of the total $428.4 billion in funds under administration (FUA) at the end of June 2011, according to research firm Plan For Life.
The figures show cash accounts and cash products as a percentage of FUA on platforms spiked from around 3 per cent during the 2003 to 2007 equities bull run to as high as 6.8 per cent in the March quarter 2009. The figure stood at 5.3 per cent at June 2011.
Platform providers such as BT Financial Group (BTFG), MLC and Colonial
First State (CFS) have been very successful in quickly moving to meet financial planners' demands for simple deposit products on platforms.
For their respective parents, Westpac, National Australia Bank (NAB) and Commonwealth Bank of Australia, the flood of deposits coming in from wraps has proved to be a boon and helped the banks reduce their reliance on expensive wholesale funding markets.
CFS general manager of product and channel development Peter Chun says further development of deposit products is expected to occur and platform developments will focus on features that allow advisers to more efficiently manage a range of income-producing investments.
But the platform success story is now coming under threat from challenger brands.
Groups including Investec Bank Australia, renowned for its institutional and corporate advisory services, and ING Direct, which is well known as a retail online banking specialist, are serious about taking a big slice of the cash sitting on platforms in order to swell their own deposit base.
Investec has been successful in tapping into the adviser market through innovative products and offering tailored services to dealer groups.
The financial services provider prices in special term deposit rates for advisers seeking to make strategic allocations to cash for a certain period.
Investec also unveiled a so-called notice account in Australia last year, which has so far attracted around $400 million from advisers, high net worth individuals and self-managed superannuation fund (SMSF) investors.
The notice account is similar to a savings account, but clients can only withdraw money from it by providing 32 days' notice. In return, they are compensated with a higher interest rate (currently 5.90 per cent) for the illiquidity.
Investec's notice account is covered by the Australian government deposit guarantee.
"We have seen advisers plan their clients' cash-flow strategies around that 32-day notice period," Investec IFA (independent financial adviser) banking specialist Gareth Bird says.
"Of course there is a degree of product education that we need to undertake because Australia is such a term deposit-centric market, but some dealer groups who have understood the concept have switched their clients from term deposits to the notice account only."
Investec plans to launch a three-month version of the notice account.
ING Direct has already gained around $1.3 billion of deposits from advisers and SMSFs.
The firm decided to seriously target those segments from mid-2010, ING Direct manager of adviser distribution Rachna Chandna says.
"We see this market as an excellent source of funding and we believe we can tailor our products and services to cater for what advisers and SMSFs want," Chandna says.
ING Direct aims to have $5 billion worth of deposits from the adviser segment by 2015.
The company, owned by global banking giant ING Group, currently has over $24 billion of deposits in Australia.
Chandna says advisers are flocking to ING Direct, even though it doesn't have an investment platform, because of its strong value proposition. "Firstly, what we offer are good rates and value-added services. Our products have no fees and clients have full access to their accounts 24/7," she says.
"To make our offering more tailored we have added features like third-party authorisation access so advisers can access clients' accounts.
"We are also building data feeds to platforms and we are doing quite a lot of work around strategies. We know that cash has a growing place within SMSFs and our advisers have called out for assistance with asset allocation strategies.
"So we are looking to build our market share by continuing to promote our offerings and also by providing more technical strategies."
Indeed, going direct is a trend resonating with some advisers, who are looking to cut costs amid tough markets and increasing regulatory pressure, including the Future of Financial Advice reforms.
Financial Choice financial planner Paul Oliver says platform administration fees on cash is one of the key reasons the advice firm switched to a direct model.
"A lot of our clients are saying: 'Why should I have to pay a 0.40 per cent or 0.50 per cent admin fee to access a term deposit that isn't even as good as the rates I can get by going to the bank myself directly?'" Oliver says.
The whole industry is going through a shake-up and everyone is questioning fees, he says.
But BTFG cash specialist Alan Martin argues platforms do add value and advisers need to look at the "bigger picture".
"The thing for me about cash on the platform is more the wider functionality," Martin says.
"The platform, if you think of it is an administration system, it allows clients to see their full financial position in one place. It facilitates tax returns; it facilitates a much bigger picture than just cash.
"We have got many other advantages outside cash directly, so I think you come onto the platform for the full experience, for the opportunity to invest in a supermarket of hundreds of investment funds and get access to the markets.
"So although cash represents today a larger proportion of many investors' balance sheet, today it's not 100 per cent of what they do."
He says BTFG was also continuing to innovate, including launching the Asgard Infinity eWrap recently, where investors only pay for what they use. "It will allow them to dial up and dial down their fees. Also term deposits on Infinity eWrap will be free of administration fees," he says.
The wrap allows advisers to efficiently service lower balance clients or those with specific needs.
MLC MasterKey general manager Dean Thomas agrees holding cash on a platform has significant benefits for advisers.
"The ability to hold cash on the platform allows clients to invest those funds into the market over time, which is a far better option than sticking it into the bank," Thomas says.
"Because when the markets change or when you want to implement the investment strategy, the money is already sitting on the platform to allow you to implement that strategy for the client effectively and efficiently."
He also disputes criticism that platforms don't get good rates. "The other thing is because we have got such large amounts of money, we are dealing as an institutional-type client so we can get very good rates from our parent NAB that we can actually pass back to investors," he says.
"So by and large the rates that we offer on our term deposits are as strong, if not stronger, than what an individual client can get from a bank."
He says recent features MLC added to MasterKey include six-month, one-year and two-year NAB term deposits and also automatic deduction functionality.
"Effectively, the adviser can take all the money in cash from day one and set up a plan for the client that will drip feed that cash over a period of 12 months or 18 months into the market as a regular deduction from their portfolio," he says.
"That's one of the reasons you would hold it on the platform. You would not get that flexibility in having the cash at the bank not linked to the platform." «
PART TWO:
Headline: Investors shift mindset to hoarding cash
Intro: Cash may not be the most exciting of investments, but it has certainly paid to be boring these past few chaotic years. Vishal Teckchandani reports.
BC: Once seen as simply a short-term parking mechanism for extra funds to deploy into risky assets or for emergency expenses, cash has become a core portfolio theme for many investors and understandably so, given the turmoil global capital markets have experienced in recent times and ongoing concerns over the European debt crisis.
Australian Prudential Regulation Authority figures reveal household deposits with banks ballooned by more than $150 billion in the three-year period to April 2011 to total in excess of $497 billion.
No doubt the introduction of the federal government's deposit guarantee in 2008 boosted the appeal of cash and term deposits to the detriment of other products such as mortgage funds.
The government has proposed to ease the guarantee to a permanent cap of $250,000 per person per institution from February 2012, from the emergency $1 million level.
The Vanguard/Investment Trends Self Managed Superannuation Funds (SMSF) Report found trustees were forging a "wall of cash" amid the lack of confidence in markets. The research, released last month, shows total cash and cash products held by SMSFs in Australia surged $40 billion since May 2009 to a whopping $113 billion.
Of that $113 billion, $39 billion was defined as excess cash or funds that would normally have been invested in other assets, but were being held in deposits due to market volatility.
The report says SMSF investors are waiting for the return of more favourable market conditions before reallocating money to growth assets.
Dealer group Infocus managing director Darren Steinhardt says while the stockpiling of cash isn't the soundest strategy, it's understandable.
"Over the past three years clients have been seeing their financial planner for reviews but have not received any good news," Steinhardt says.
"Many are feeling like they cannot continue to go through this volatility much longer.
"Financial planners who have not had a strong client value proposition or provided sound strategic advice are facing challenges as some clients may blame them for poor performance."
Investec Bank Australia IFA (independent financial adviser) banking specialist Gareth Bird says there has been somewhat of a structural shift towards holding more cash.
"Before, cash was seen as a smaller strategic part of the asset allocation model; it was money waiting to be invested," Bird says.
"Whereas over the last couple of years there has been almost a permanent change in the mindset that has taken place and people are now holding much larger allocations of cash in their portfolio."
BT Financial Group (BTFG) cash specialist Alan Martin says defensive investments would continue to boom in popularity following the global financial crisis (GFC).
"One of the things that's always been fundamental in Australia is a strong equity holding within superannuation," Martin says.
"When you look at Europe and America, their allocations change with age, so they have more equities when they are young and some fixed income as they get older and in retirement they are mostly in fixed income.
"Australians have always had a bigger share of equities."
He says the market turmoil in the past few years will result in investors allocating more to cash, fixed income and annuities within portfolios.
"I think people are going to start changing their strategies and start moving towards the European and American model, where people will start saying 'I'm 55 now, I should not be holding onto so many equities'," he says.
ING Direct manager of adviser distribution Rachna Chandna says some of the banking group's SMSF clients are holding 30 per cent to 50 per cent of their entire portfolios in cash.
"So the SMSF sector has revealed that cash is being treated as a legitimate long-term asset and not a parking mechanism," Chandna says.
"Cash is becoming part and parcel of their asset allocation strategy. It is an asset they are using to lower portfolio risk and even out volatility, particularly in the retirement phase when they need income."
Cash assets provide a safety net during uncertain times as well as the "sleep at night" factor, she says.
"The experience investors went through has put a lot of fear into investors and it's still raw in their minds. So as we see those returns on equities come back in, investors are seeing cash and term deposits as a safe investment option," she says.
"I think in time equity allocations will readjust themselves higher, but what we will see is that cash will have a place, a bigger place, within the asset allocation."
But CommSec chief economist Craig James cautions against this approach.
"In these current uncertain times, investors are opting to leave more of their funds in cash rather than shares," James says.
"However, the fact remains that shares have outperformed all asset classes over the past 20 years."
Over the past two decades, the All Ordinaries Accumulation Index has risen 433 per cent or around 22 per cent a year - with some blue chips delivering far above that.
"If $100,000 had been invested at the end of 1990, it would have been worth $804,000 at the start of this year. If the same $100,000 had been left in cash, it would now be worth just under $305,000," James says.
"While the preference for cash and deposits is understandable, it ignores the fact that shares have outperformed other financial assets over the long term.
"The desire for capital preservation may dominate at present, but at some point longer-term investors will have to stand back and look at the big picture."
Vanguard Investments head of corporate affairs and market development Robin Bowerman says SMSF trustees turning more to cash and term deposits have a pessimistic outlook on the future growth of the Australian economy and major local companies.
"Given recent market volatility, that's not surprising, but you worry about investors trying to time markets rather than staying on course with a long-term asset allocation plan," Bowerman says.
"A more conservative asset allocation may be absolutely right for an investor's circumstances, however, it is vital for investors to remember that a diversified, low-cost approach to investing that maintains market exposure during turbulent trading days and looks past the short-term volatility has the greatest opportunity of investment success."
Fidelity Australian Equities Fund portfolio manager Paul Taylor agrees investors should take a long-term view to successfully create wealth.
"To me, that's really the way you've got to think through the volatility," Taylor says.
"You don't think about buying a house and selling it in three months' time; you think about owning it for five years, 10 years, 10-years plus and given the yields that are on offer and the growth that's on offer in the Australian market, you are stacking the odds in your favour."
He says the Australian share market is presenting investors with many solid long-term investment opportunities as it is trading on a historically low valuation of around 10 times earnings and yielding nearly 6 per cent.
"Even if the market does nothing, you are picking up pretty much a 6 per cent after-tax return, so we think that's a really attractive level," he says.
The yields are also sustainable as Australian companies have strong balance sheets and good cash flows.
"Gearing ratios long term have been averaging about 32 per cent; right now we are closer to 20 per cent," Taylor says.
"Australian corporates have very strong balance sheets, they don't have a lot of debt, they're in a really good position, their balance sheets got repaired as we went through the GFC as they raised equity.
"As we stand here today, free cash flow even after dividends is pretty much at highs, so we have got the cash flow to pay out the dividends and we have got really strong balance sheets from corporates." «
