Is there a price war coming for investment platforms?

Andrew Alcock is the CEO of Hub24, the listed investment platform business which has been growing pretty rapidly, although the shares got smashed in July after BT announced a cut to the price of its Panorama platform which led everyone to think that there’s a price war coming for investment platforms. Indeed, that may or may not be happening, we’re not sure because we haven’t heard much since then. The key reason for calling Andrew and to talk about what’s going on is what is going on, is there a price war and is it going to affect Hub24? And does that mean that Hub24 is now a buy since they’ve come down or what?

I’m not sure we got to the bottom of it partly because it’s such a difficult area. It’s very difficult to actually pin down what these things are charging, and is there a price war and is BT undercutting everybody or not? Because their prices are obscure, shall we say, opaque...I think it’s a disgracefully complicated area and doesn’t need to be this complicated, but the point I suppose about Hub24 and the other platforms is that the whole industry is undergoing a revolution. It started before the Royal Commission, but as Andrew points out in the interview, the Royal Commission has accelerated the revolution of the industry, which is to de-institutionalise it. 

The institutions like the banks and AMP are in trouble essentially as wealth managers because of the behaviour that is now being uncovered by the Royal Commission. I think these businesses are worth investigating for investment purposes, that’s for sure. 

Here’s Andrew Alcock, the CEO of Hub24. 

Andrew, I suppose the things that investors have been focused on lately has been the prospect of a price war in platforms, particularly after BT cut its prices in July.  Can you just bring us up to date?  What’s going on here with prices and are your margins getting squeezed at this point?

Alan, it’s a great question.  I think that not is all as it seems in the marketplace.  Absolutely, BT have come out with a rate card that brings them far closer to market with where other participants in the market such as ourselves and Netwealth are.  It’s not an unseen rate cut from our perspective.  We have competed against that rate card before it was published and still won business and deals.  It’s just bringing them up to market to where we’ve been already.  I think that it means we might think about how we package our pricing but I’m not expecting margin compression for us because we’ve really been at those sort of levels to date at the moment anyway.

I’m looking at a chart from Morgan Stanley that was published at the time, showing all the various prices, platform fees from $100K.  According to the Morgan Stanley one, your fee on $100,000 was 75 basis points and BT’s was 32.  Is that correct?

I haven’t got the numbers in front of me.   What I can absolutely say is our published rate card is actually a published document rate card.   What Hub24 does that’s quite different is we actually tailor our price based on the services and features that our clients and advisers use, so very rarely is that published rate card used when we actually negotiate a business relationship with licensees and advisers.  What I do know is that the BT rate card has cash margins in it that support a lower fee, i.e. there’s 2.1% of cash of a fee that goes to BT on cash balances.  When you actually round that out, if we implemented the BT rates across our book, our revenue would actually go up.  So whilst I can’t answer the specific question about what we charge for each client, because it does vary very greatly, if I apply their rate card to our book, our revenue would increase.

Right.  Well, you’re actually highlighting one of the problems with this are which is that in particular for clients as opposed to financial advisers, it’s all pretty complicated, nobody knows what the hell’s going on.

It is absolutely complicated and nothing is as it seems.  Even when you look at our rate card in public, it’s not as it seems and the BT rate card has headline rates that doesn’t actually potentially highlight the minimum account fees that go with those accounts which we don’t charge in the same kind, i.e. the $540 for an account keeping fee.  Generally, we don’t charge that fee.  When you compare the basis points, they’re just not straight line comparisons, Alan.  It is very confusing.

Yes, it’s impossible to figure out who’s charging what.  As you point out, the Morgan Stanley thing and other comparisons are very challenging, shall we say. 

Look, it’s simplistic, it is challenging.  It’s difficult, people have different pricing strategies.  What I can say is people also have different value and different capabilities, so it’s not always comparing apples and apples.  Our platform does a lot more than just administer assets, as do some others.  It’s about what value you can create and if you can actually create tax benefits and greater financial outcomes for consumers, price because less of an issue as opposed to the creation of a nest egg and that is quite complex.  I think the industry could do a better job at actually unpacking that so better comparisons can be made. 

Is it fair to say that your main competitor is Netwealth since you’re both independent platforms, whereas BT obviously is connected to Westpac, there’s the AMP platform and IOOF and so on which are all connected to manufacturers of investment products?  Is that a fair statement or are you all competing, in a sense, equally?

I think there is very much a different playing field out there.  Netwealth and ourselves are not institutionally aligned.  Netwealth do manufacture some investment products, Hub does not.  But at the same time, you’re correct to say we’re in a peer group of our own and we do compete against the institutions very much so.  But I think what’s driving that is value, price, product selection and open choice.  On Hub24, you don’t just have the choice of, let’s say – we were talking about Westpac before – just Westpac’s cash products.  You can have multiple cash products from other providers, multiple insurance providers, which is why advisers and clients are looking at solutions like ours, because we open the market up as opposed to just selling the house products.  

In July you reported record net inflows for the year of $2.4 billion, a 24% increase.  To what extent is that due to a broad de-institutionalisation, that there is a swing going on by advisers away from institutions towards independent platforms like yours?

I think our flows over the last few years have been contributed to by that force in the industry.  You’d have to have great products and great services to benefit from those forces, but it is increasing and there’s no doubt that we’ve got interest from advisers who have unaligned themselves with institutions or advisers whose clients have said, ‘I don’t want to deal with the bank and I want real choice.’  And advisers who’ve looked at – ‘Gee, well these institutional platforms are old.’  They don’t have the capability that some of the new players such as Hub24 have that can create real value.  Those things together are driving that trend but definitely there’s a shift.

I suppose what you’re highlighting is there’s two forces at work in a way.  There’s the technology force and you’re saying that your platform is newer and better than theirs.  But the other force of course is the Royal Commission, can you talk to us about what impact that is having on your business?

It’s still early days, but absolutely in the first round of hearings, we had a lot of interest, a lot of inbound traffic, if you like, and calls from advisers who were saying, ‘Can you help me?  My clients are questioning why I have my funds in a particular institution’s platform.’  And so the early indications were consumers were asking advisers questions and advisers were re-thinking where they stand.  I think the Royal Commission is just accelerating a trend that was already there about FOFA, commissions, choice…  We’re just exposing something that needed to be exposed and those participants in the market who don’t operate in that environment who have a clean, unconflicted model, are benefitting from that and the Royal Commission is just driving it home even faster.

I couldn’t agree more, Andrew.  Do you think we’re in a process now that’s going to end up with all financial advisers being unaligned, that the era of financial advisers being the distribution arms of big firms like banks and AMP is over?

I think there’s several potential models and that’s absolutely one of those potential outcomes, Alan.  I think that I’d be very surprised if institutions aren’t required to have more product choice and demonstrate that product choice.  There’s already moves afoot where they have to publish those sorts of percentages.  I think what we might find is that we’ll end up with potentially two types of advisers, those that are unaligned and looking for the best outcomes, and those that are effectively salespeople selling and institution’s product, where it’s clear that they’re selling an INSTO product.  That’s a possible outcome here as well, where we have a polarised industry, one where there’s true advisers and one where there’s distributors of product.

Otherwise, we’re going to change the playing field very dramatically and see that no product manufacturer has any aligned distribution.  I can’t see Australia going in that direction but it’s a possible outcome.

Isn’t there a potential problem for you and Netwealth in this that it’s possible, isn’t it, that the advisers become unaligned – and that’s obviously happening now, whether it happens entirely or not is another matter, but clearly advisers are starting to become more independent – but isn’t also possible that the platforms that the institutions own also become separately independent and the manufacturers, the AMPs and banks of the world, say, ‘Oh well, there’s no point owning a platform anymore, we might as well just make that then.’  So they hive them off so that BT’s Panorama actually becomes a separate product that competes with you and so on through the other ones, isn’t that a possible outcome as well?

It’s absolutely a possible outcome.  Does it bother me or Hub24?  No, we’d actually welcome that because it’s clear where the investment’s being made and which platforms are delivering superior outcomes.  I think BT are much better prepared for that than let’s say some of the other institutions who haven’t invested like Panorama did and who currently have products who are way behind.  From that perspective, I think that just opens the market up to more choice and those who invest and deliver great value will be the winners in that case.  Not afraid of it, I think it’s a good outcome for the industry and for Australia to have standalone strong platform providers who get paid for delivering value for clients.  As opposed to get paid for delivering compounded or conflicted sales, I think it’s a positive and we’re well positioned for that being a leader in the tech and the service to date.

Do you think BT actually has that in mind with Panorama?

I don’t know.   Westpac has been very, very strong about saying they’re committed to wealth.  They did that recently when they launched the new rate card, so I take that at face value and they’re saying they’re committed to this part of the industry.  I’m sure that every institution though looks at its entire portfolio all the time, the risk of that portfolio and the capital required to run it, just as Westpac’s peers did.  All three of them have put their hand up and said that they’re exiting in some form those type of businesses.  Westpac are out on their own. 

Which of your metrics do you think is the more important, the funds under administration in dollars or the number of advisers you’ve got lined up?

From our point of view, we think about the number of advisers because it’s an indicator to growth and it’s an indicator to people adopting our model.  The funds under administration will grow.  We’re very, very small, we’re at less than 1% market share, yet the number of advisers we have is driving us between 15-20% of market flows year on year, that for us is the key stat because it’s driving growth for us.  And if the growth is there it means we’re getting something right.

You’ve got 1,200 advisers roughly, or I think you had at the end of June, is that right?

Yes.

How do you go about signing up advisers and what sort of growth in the adviser numbers are you getting?

We’re getting between 30 and 50 advisers a quarter joining up, we’ve had a similar trend since June so far for this quarter.  It works a couple of ways.  In some cases it’s through our having a relationships team working in the market and talking to individual advisers.  In other cases it comes from having a relationship with let’s say, a licensee or a dealer group, where we’re able to access that group through a more commercial or wholesale arrangement.  It’s a top down and a bottom up approach to finding people who value what we’re doing.  

When you talk about the number of advisers, 1,200 firms or individuals?

That’s 1,200 advisers.  There’s certainly a smaller group of licensees, I wouldn’t have that number at hand but that’s individual advisers who use the platform.  For example, since 1 July we’ve had eight new firms join us and the growth is still there.

And obviously with each firm comes a number of advisers, is that right?

Absolutely, Alan.  In some cases you’ve got a firm which may have hundreds of advisers, they’re rare but we do have quite a few of those.  In other cases it might be one or two sole practitioners.

When you win a firm or a group of advisers, they’re coming across from usually – is it a bank platform that they’re coming from?

Typically it would be because that was mainly the dominant part of the industry.  Most of our new business flows come from either banks or in some cases, industry funds where consumers have sought advice and are changing direction in terms of how they look after themselves.  Many of them come from banks and institutions like Macquarie and AMP and IOOF.  

Is it a big deal for them to switch?  I mean, does it take a while, is it a hard process for them to switch their business from something else?

It is a hard process and in fact, we don’t even expect to pick up their entire business, that’s not the way this works.  Typically, an adviser will look at our offering and look at their clients and they may put some of their newer clients onto our model and as they review clients on an annual or bi-annual basis, they might look at that and evaluate that it’s really in the better interest of this particular client to bear as well.  Let’s bear in mind that there are taxation consequences and insurance consequences, we don’t want people moving platforms and being disadvantaged.  It’s not a clean sweep and not intended to be.  It does take between 18 and 36 months for an adviser to get a material portion of their client base moved if they move it that fast.

They have to sell their shares, their assets, do they, in order to switch them across?  You can’t just take their existing holdings into your platform?

No, this is why we said earlier it is a very complex industry.  If you have your own self-managed super fund, you can actually move the assets from platform to platform because they’re owned by the trustee and you don’t incur those costs.  If you’re in a retail superannuation fund, yes if you’re changing platforms, the possibility is that you’ll incur capital gains tax on any growth you’ve had, which is a deterrent to moving or it’s certainly something that has to be calculated and factored in.  What are the benefits of moving to the newer technology with the newer features, versus where does my taxation stand?  Those are absolutely complex decisions that have to be made for every single client.  Hence, we’ve had ASIC looking at some of the institutions as to whether they’ve actually met those criteria when they’ve been moving money in and out of institutional platforms. 

Well, I suppose what you’re highlighting is the fact that a lot of the people who are on the bank and other institutional platforms are actually not just on the platform, they haven’t got their self-managed super fund on the platform, what they’ve got is they’ve got their BT super fund.  They’re in the BT fund or whatever it might be and in order to move off into your platform they actually have to get out of that fund, that’s the problem?

They do have to leave the fund and it’s not something that should be taken lightly, but if you absolutely can get a lower cost and some better outcomes, it’s a sensible consideration.  But you are leaving a super fund and you are having to crystallise your position in that fund.

Can you tell us a bit about what the sales pitch to the adviser is?  Because presumably it’s to some extent about price, that your price on the platform is lower now that BT’s come down, so they’re kind of not…  But I imagine some of the others are still higher.  I imagine, is it the case that the advisers tend to pocket that money, that difference?  For them, that’s an increase in their revenue?

I think there are some cases where that occurs, but generally I think if I was delivering advice, I’d want to make sure if I was moving my client was getting a better overall end to end cost outcome or some really significant benefits in terms of investment outcomes.  Absolutely, the sales pitch is not just about price of platform, it might be price of underlying investments.  Our technology allows you to run some, what we call managed accounts, which is a new form of managed funds if you like, and those costs can be far lower but the clients actually owns the individual parcels of assets, which means they get far greater tax benefits in the future than they would in a pooled fund. 

Again, it’s complex, but it’s not just pricey.  It’s technology, it’s the ability to get great reporting, it’s service and it’s features and access to a range of investments, and open choice in terms of which cash products and which insurers you might use.  It’s a range of factors.  Price is one of the top four factors for advisers, but the others are service and range of investments and functionality.

And is it possible to easily explain to us what the functionality difference is.  What do you do that some of the old bank platforms don’t do?

We have a very comprehensive mobile technology solution, so clients and/or let’s say pensioners can actually have a look at their balance real time on their iPhone or on their android.  We allow the linking of accounts from outside onto Hub24 so you can actually view if you have your own equities or stocks that you might hold and you’ve got to hold them on the platform.  We can show them as if they are on the platform and give consolidated reporting.  We’ve got a whole lot of efficiency in the managed account space, we allow advisers to really think about how to create better tax outcomes for consumers by allowing them to manage their tax passes. 

Which again, is quite complex but it can really generate huge differences.  We’ve operated in an environment where technology and the legal structure of a managed fund has dictated how much an investment manager can achieve for a client.  Those things are being thrown away by the use of technology to automatically decide tax outcomes or to give clients options when they change – ‘Don’t do this or you’ll incur this tax’ – in a real time environment is really saving money.

Are you tempted to have your own super fund so that people don’t have to have a self-managed super fund to be on your platform?

We do, actually, Alan.  Half of our $8 billion is in a retail Hub24 fund. 

Sorry, there you go.  Okay, and that’s, in a sense, competing with the other retail funds and industry super funds?

Absolutely, it’s about half of our business and it’s growing quite well and it’s the same product we have for outside of super and it is competing with the others.

Is that super fund product growing more quickly than the other half?

No, look in terms of dollars in the door, it’s absolutely growing at the same sort of pace.  However, the balance for individual clients is generally lower than the non-super investment, which says to me there’s more customers joining our super fund and that would be right given the population and the demographics of the nation in terms of mass affluent consumers.  There’s more joining the super fund with lower balances.

We’ll have to leave it there and let you go, Andrew, it’s been great talking to you, thanks.

Thanks, Alan, cheers.

That was Andrew Alcock, the CEO of Hub24.