Smart Investor: Getting Started, May 2013

Smart Investor, May 2013

Getting Started

The idea of the investment platform – a term which embraces mastertrusts and wraps – is to bring simplicity to your investing life.

With a platform, you log on, put in your password, and then have a choice of a host of options – often including hundreds of different managed funds, and sometimes ASX shares too – in which to invest. All the investment reporting and admin is consolidated, which is particularly useful on two occasions: at tax time, when all your gains, losses, dividends and so forth will be simply collated for you; and when you want to get a picture of how your overall investment strategy is doing, because you will receive valuations that cover your whole portfolio.

Quite apart from the admin side, there are a lot of attractions to platforms. Many of the funds on offer are either not normally available to Australian investors – particularly global equity or bond funds – or are only available with a very high entry investment like $50,000. Through a platform, you can often access the same fund with an initial sum in the region of $2,000. Not only does this give you access to more possibilities and opportunities than you could manage on your own, it makes it a lot easier, and considerably cheaper, to gain proper diversification by spreading your money between shares, property, cash, bonds, and perhaps varying it by geography and individual stock market sectors too. A balanced portfolio usually means smoother long-term returns and less to worry about.

So what’s the catch? The main one is cost, as nothing comes for free. Platforms add on another layer of fees in order to meet their administration costs. This can have various names but a platform fee or administration fee is common, and this is on top of the fee for the fund itself.

Set against that, the fee for the fund is typically lower through a platform than by going direct to the fund manager, so often the two balance one another out. But then again, the rise and rise of low-fee exchange-traded funds, which offer an easy way to get the return of an index like the S&P/ASX 200, have made it easier for investors to get diversification for a low fee.

The other question you must ask about a platform concerns transparency. How did all those funds get on the investment menu? In theory, a platform manager will be acting in your interests by selecting a range of the very best funds for you to choose from. This is what’s known as the principle of open architecture: that you will have free choice, and that even if the platform administrator is part of the same company that owns a fund manager, that manager’s funds won’t be forced upon you or favoured any more than their rivals.

In practice, though, regulators have started to take a close look at this issue in recent years, and in particular something known as a shelf fee – where a fund manager pays for its place on a platform, with the fee based on the volume of funds it receives.

This is all going to change under what’s known as the Future of Financial Advice reforms, driven by the Australian Securities and Investment Commission, a regime that comes into effect on July 1 2013. This bans any form of what it calls conflicted remuneration, and will cover these volume-based shelf space fees, at least for new investors. It’s not quite clear exactly how platforms will change as a consequence of this – it may become harder for new funds to get noticed – but we can already see a few trends in the way people use platforms.

One trend is that people use platforms less for managed funds and more for cash deposits and direct equities these days. Before the global financial crisis, about two thirds of platform money went into managed funds; this was chiefly what they were used for. Now, new flows only go about 40% into managed funds, according to research group Investment Trends, with 30% going into cash and term deposits – double the figure of a few years ago – and direct equities are expected to be the biggest area of growth in future.

This suggests people want to handle more and more of their financial arrangements through a platform, but also a willingness to do things themselves rather than always going to a professionally managed fund. People love the administrative simplicity of platforms, it seems, but no longer do managed funds have a stranglehold on how we invest.

BOX: Platform facts and figures

• On June 30 2012,  there were $423.1 billion in assets under management in wrap and mastertrust platforms, according to Plan for Life (which uses the term masterfunds).
• This was down $5.8 billion in a year, partly because global investment markets were hit by problems in Europe and the US.
• $112.6 billion of inflows were recorded in the year to that date, and $104.3 billion of outflows: that’s pretty choppy. Net fund flow is well down on 2007, the previous peak.
• The four biggest players in the platform industry – BT, National Australia Bank/MLC, AMP, and Commonwealth/Colonial – between them account for 73.5% of the entire industry, and the top 10 (adding OnePath, Macquarie, IOOF, Mercer, State Super and Perpetual) make up 95.8%.