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Is there an Uber or Amazon of wealth? Part 2

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction.”  Bill Gates

Part 1 was a focus on short term disruption and the potential for a new entrant to gain a significant slice of the wealth market, and concluded:

I don’t see how any company can make wealth management sufficiently exciting for enough people to grow a market share of 5 to 10% in the next few years. To use Google’s test, what problem will the disruptor solve in such a novel way that hundreds of billions will divert from incumbents? I hope I’m wrong because it would be fun to watch.

Part 2 takes a longer time frame over the next decade to 2025, and predicts the likely winners and losers, especially for superannuation.

The power of incumbents

The three main (but not only) parts of the wealth management value chain are financial planning, administration services and asset management.

While each is a distinct service, the market is dominated by businesses that perform all three roles, although clients may not realise their adviser is aligned with one of the big players. The four major banks plus AMP 'control' about 70% of financial planner business. Many clients of the Commonwealth Bank who meet a planner in their local bank branch will be set up on a Colonial First State administration platform invested in a fund managed by a group subsidiary. Such ‘vertical integration’ is the subject of much angst from consumers, regulators and governments but it received relatively little attention from the recent Financial System Inquiry. A recommendation to review Stronger Super in 2020 is at least two Federal elections away.

However, despite their vast distribution networks, these retail fund businesses are far from winning the superannuation race they dominated until around the GFC. Between 2007 and 2008, retail super funds, heavily invested in equities, fell significantly, while SMSFs (labelled ‘Small’ in Chart 1 below) attracted new members and held a more conservative asset mix with 30% in cash and term deposits. SMSFs overtook retail funds in 2009 and now hold about one-third of the $2 trillion in super. And whereas a decade ago, the industry funds were less than half retail funds, they are now around three quarters and catching up fast.

Chart 1: $ billion held by various superannuation industry sectors

GH Picture1 100415

GH Picture1 100415

Source: APRA Annual Superannuation Bulletin, revised February 2014

Of course, other providers specialise in only one part of the wealth value chain. There are thousands of non-aligned financial advisers who argue they are more independent and better able to act in a client's best interests. Similarly, there are dozens of sophisticated administration platforms, especially (but not only) for assisting in the management of SMSFs, which allow investors to hold almost anything. And there are hundreds of asset managers holding billions of dollars (super and non-super), all claiming special talents which shout ‘choose me’.

Industry funds in the context of market disruption

Two of the major competitive forces, SMSFs and industry funds, are almost unique in the world in their structure, making the likely future outcome for wealth management in Australia different from other countries. Chart 2 shows market shares of superannuation assets and these two segments are the big winners in the last decade. According to Rice Warner, while corporate funds, retail (‘Commercial’ in the chart) funds and public sector funds have all fallen significantly, industry funds have doubled their share of the large superannuation fund market (excluding SMSFs) from 15% to 30% since 2004.

Chart 2: Market share of the superannuation industry, 2004-2013.

GH Picture2 100415Source: Rice Warner submission to the Financial System Inquiry, page 14.

What are the strengths and competitive advantages of industry funds that will enable them to thrive in the face of new sources of competition?

  1. Client acquisition. Most people who start their first job on the checkout at a supermarket at the age of 15 are given a ‘starter pack’, and it includes an application form for the Retail Employees Superannuation Trust (REST). It’s not only low income earners, as Unisuper’s position in universities shows. The largest, AustralianSuper, manages almost $90 billion. While industry funds have experienced some leakage to SMSFs, the majority of clients stay for life.
  2. Higher satisfaction ratings. Without entering the debate about whether it is perception or reality, industry funds are considered to deliver performance at least as good as retail funds at a lower price. Industry funds have led retail funds in overall satisfaction ratings for over a decade. As shown in Chart 3, what is most surprising is the satisfaction gap is much greater with larger balances, where investors are likely to be better informed and engaged. Satisfaction is similar for under $5,000 but wide for over $250,000, which accounts for only 10% of customers but a whopping 43% of balances. It’s not an encouraging sign for retail funds gaining large clients from industry funds.

Chart 3: Satisfaction with financial performance of superannuation by balance held

GH Picture3 100415Source: Roy Morgan Research, six months to December 2014, sample n=15,932.

  1. Not for profit structure. Industry funds have only one type of stakeholder, their members. This clarifies decision-making and should lead to singularity of purpose, of improving member returns and services at the least cost. Retail funds must satisfy shareholders demanding an economic return on capital, requiring a profit margin built into fees.

This final point is the most important for long term expectations. As industry funds grow, the largest bring more of their funds management in-house. The economics of paying competitive salaries for top fund managers are compelling for a fund with say $50 billion in total and $20 billion in equities, paying 0.40% to an external manager. That’s $80 million in fees, which covers a lot of salaries and bonuses. Even if asset management is not brought in-house, an ever-expanding range of sector index funds plus smart beta funds are available at a fraction of the fees of active managers. With the guaranteed SG inflow from a largely disengaged client base choosing default funds, they have the potential to lower fees significantly over time.

Within 10 years, as funds grow with a largely fixed cost base spread over more assets, industry funds will commonly deliver their main default balanced fund options for 50bp or less all in. That will cover asset management, administration and even some financial advice. All the large funds will further develop their advice capability at subsidised costs with salary-based staff, removing many of the arguments about conflicts that come from commissions. While advice will not be free, it will be attractively priced, again with no profit margin driving the fees.

The main risk facing industry funds is that the government may remove the privileged position as the nominated funds under employee awards. This may be matched by increasing the number of independent directors, a change which may assist public perception. Either way, industry funds will remain a major force in the market, probably stronger than their current market share of super. Retail funds have their MySuper products around 1%, but they will not deliver better fund performance to make up for the higher fees. Even where industry funds outsource their asset management, they use the same managers as retail funds and can negotiate rates which are at least as competitive.

The rise and rise of SMSFs

The improvement in technology and developments in ‘fintech’ and ‘roboadvice’ make it easier than ever to manage an SMSF. An administrator can sign up a new SMSF, including opening a bank account, broker links, access to a term deposit aggregator, full trustee identification and comprehensive reporting, all online in less than 30 minutes. Without entering the debate about the minimum amount required for an SMSF, it is certainly cost competitive at amounts above say $500,000 (and many argue much less), where even a low 0.5% is $2,500. This will cover tax returns, audit and reporting for a simple fund, which can then choose inexpensive investment options such as ETFs or direct ASX investments to keep management costs down.

Retail funds have obviously done well in the rising stockmarket of the last few years, and they are far from struggling. Staff have still received their handsome bonuses. But there’s little sign of a drop off in the establishment of SMSFs, now well over half a million.

Chart 4: Membership and number of SMSFs

GH Picture4 100415Source: Australian Taxation Office, SMSF Statistical Report, June 2014

With around 30,000 new SMSFs established each year, that’s about 100 a day, with an average of two trustees. Over one million Australians have signed a 90 page Trust Deed taking legal responsibility for their own superannuation.

A recent report entitled ‘The 2015 Automated Investment Advisers Global Market Review’ by FinDigital and Ignition Wealth reviewed 45 roboadvice offers, and found they were often targeting self-directed investors including SMSFs. Technology is not only for younger generations as the roboadvice offers appeal to older investors due to the better customer experience and lower fees. These developments are likely to encourage more SMSFs, as the simple advice models suggest planning decisions relating to risk assessment and asset allocation can be done without an adviser.

Where does that leave the retail funds?

Retail funds will continue to grow in absolute terms, even while they lose market share to industry funds and SMSFs. Their distribution networks and provision of most of the ‘face to face’ financial advice will ensure they remain strong businesses. They have billions invested in technology, and they have the marketing resources to attract corporate super, where 80% of people do not actively select their own fund but default to that selected by the employer.

On the platform side, it's an industry truism that managed funds are sold and not bought. Financial planners have their favourite platforms or funds around which they build their administration and model portfolios, and it’s not easy to change. The retail providers will continue to service their networks well.

But it is increasingly easy to create the same asset allocation possibilities using the ASX and a collection of ETFs, LICs, listed bonds, alternatives and shares. There are dozens of simple administration platforms of varying sophistication which might cost as little as a few hundred dollars a year. A copy of the contract note for the trade on the ASX is automatically sent to the administrator for a portfolio to be updated real time. They may not have the tax sophistication of a full retail platform but the information automatically generated at the end of the year makes the financial return straightforward for a competent accountant. The ASX's mFund service delivers managed funds previously available only via a platform or long form PDS.

What about fintech, roboadvice and other new providers?

Fintech and roboadvice are starting to make an impact in wealth management services. The basic approach requires a client to answer a series of questions to assess their risk capacity, income, assets and long term goals, and an algorithm generates a suggested portfolio. There may be online or video conversations with an adviser. It is clearly no substitute for a bespoke, personal consultation with a skilled financial planner, but a minority of people have a planner. And while most people nearing retirement are no doubt missing out on good planning ideas, such as making the most of superannuation, estate planning, insurance and portfolio construction (to name a few of the things a good financial planner will cover), for many the roboadvice is a major step forward in the diversity and sophistication of their retirement planning. Chart 5 shows how much the word ‘fintech’ has entered our search conversations (acknowledging ‘fintech’ has a much broader definition than only wealth management).

Chart 5: Google Trends based on search term ‘fintech’ with April 2015 the ‘base’ of 100

GH Picture5 100415While many criticise the simplicity of roboadvice, it offers better opportunities than keeping money in the familiar places of cash, term deposits, bank shares and residential property (not that such a portfolio has done poorly in recent years, but it does lack the diversity that international equities and other asset classes bring).

Such online advice and implementation is usually cheap, based on ETFs with an all-in cost of say 0.25% per annum. Although Vanguard moved into online advice based on index funds, it recently added active funds for clients who want to complement indices with active stock and bond pickers. Active management remains a massive market and roboadvisers will not necessarily ignore it.

We are only at the beginning of an exciting new development: the market leader in the United States, Wealthfront, has only about USD2 billion under management, a tiny (read insignificant) share of the market despite its high profile and slick technology.

In Australia, some early movers are Decimal, Stockspot, SelfWealth, AdviceConnect and BigFuture. In the United States, more advanced are Betterment, Wealthfront and PersonalCapital, plus more established names like Charles Schwab and Vanguard.

As we discussed in Part 1, many of the new entrants in roboadvice will do well, as they have relatively low costs and capital needs, and a couple of billion under management can be an excellent business. But with $2 trillion in super, a 1% market share is $20 billion. While 1% is hardly market disruption on the scale of Amazon’s effect on Borders, are there any trusted names which have the capacity to raise this much over say the next decade?

If the technology (ETFs, roboadvice, cheap administration) had been available 10 years ago, then a name like Virgin may have made a bigger splash. Its brand was moving into everything, but its impact has been largely confined to credit cards rather than superannuation. Virgin is one of the most recognised brands in the market, yet it struggles as a wealth management name.

The best technology companies and retail brands in the world, such as Google, Apple, Facebook, Twitter, Microsoft, Ebay and Amazon, clearly have the deep pockets and distribution to design solutions that can gain a big following. It’s reasonable to expect them to see the opportunities in wealth and consider it an extension of their existing businesses.

And of course there are points of intersection where incumbents use new technology to improve their own offers. Regardless of developments, face to face advisers will always have a role in coaching and guiding their clients, especially where needs are complex such as estate planning, tax, aged care and retirement. These advisers can use roboadviser tools to help with risk assessment, portfolio selection and investment reporting. This will be complementary to moving the financial advice industry into the more professional status so keenly sought by the industry.

Conclusion on the future of wealth management

Technology can change industries almost overnight, and in hundreds of ‘tech hubs’ around the world, some of the smartest brains of any generation are working day and night to develop an online investing and advice solution that will change the world. The former executives from Kodak, Blockbuster and Borders know that even experts in a business do not see the freight train coming until it runs over them. The new generations of investors are far less loyal to existing relationships and open to innovative forms of technology.

Recognising the warnings by Bill Gates not to underestimate long term change, my expectations are (defined for simplicity in terms of superannuation): SMSFs to continue to increase market share but with some natural cap due to most people remaining disengaged with investing; industry funds to gradually lower fees and expand more into advice and to take over retail funds as the second largest segment; retail funds to remain strong based on broad distribution but to lose market share due to higher fees without better performance; and new entrants using elegant online solutions to have some great successes and great failures but no single new party will have greater than 10% of the market by 2025.

(A six-minute video to go with this article is linked here).

Graham Hand has worked in funds management, investment banking and retail banking since 1979 and is Managing Editor of Cuffelinks.

32 Comments
Ramani
May 09, 2015

I found the comments instructive: in some cases more about the commentators than the subject of wealth disruptors being the next Uber or Google. "Give me your comment, and I identify your lobby.."

None of the victors will concede seeking to be disruptors (naturally). Instead, they fancy themselves as innovators, value-addders and path-breakers. Hey, when did the oh-so-pleasurable concubine or sugar daddy ever confess to being a family destroyer?

On sustainable ways of creating wealth, let us assume that the current intractable constraints hard-wired into human behaviour remain, as past evidence shows every attempt to address them triggers a wave of circumvention. Rule of Law!

On this basis, industry funds will enjoy (the almost faith-like) cult protection of unionised members, despite their creeping convergence towards retail-like fees and insurance costs levied by those who own insurers. Any one who runs a corporate fund would have their rationale questioned (barring large businesses scarred by retail and industry fees). Exempt public sector funds (other than military, for jingoistic reasons) will gradually be substantively subsumed into sovereign -type funds.

What of SMSFs, the elephant herd in the room? I am more with Boyd than Bill on the looming implications of ageing (sadly, owning an SMSF does not confer immunity from geriatric deterioration: though a recent research revealed that it miraculously adds three years to life expectancy - see my discussion post). But I will add my own 'retired regulator' and 'not a retiring actuary' twist to the 'retired CFP' prediction, which Bill should find fits the bill.

SMSF members are already bedevilled by complexity of super and tax laws, no regulatory scrutiny of risk management, dominant trustee syndrome, advisers acting as shadow trustees and greedy offspring waiting for the pop to pop or mummy to become a mummy. Put this in the context of financial illiteracy, advisor and product pusher crime (played out through reported instituitionalised retail scams) false conflation of professionalism and (as FOS Tregill recently lamented in AFR) no compensation scheme. And they are supposedly in charge?

The outcome will be a large loss in the sector (if large enough, publicly funded as in GFC). This might trigger driving licence-type checks for trustees as punishment for advisors acting as shadow trustees.

In short, we badly need a SMSF disaster before the policies will reflect risk-adjusted reality.This is my 'Nostradamus-meets- Orwell' actuarial predi(le)ction.

Jason Kaye
April 15, 2015

That story neatly encapsulates the choice of attitude in front of established players Graham. I'm firmly in the "it's an amazing opportunity" camp as I'm sure are all the other start-ups in this space who are dedicating time, effort and money into delivering a new set of digitally led, dead simple, transparent and cost effective outcomes to the majority of customers out there.

Jason Kaye
April 15, 2015

Another excellent article Graham. With only 1 out 10 people engaged with their superannuation and only 2 out of 10 people utilising the services of a financial planner, I'd say the market is almost begging to be disrupted Kenny T.

Graham Hand
April 15, 2015

Thanks, Jason. I'm reminded of the story about two companies that each send a shoe salesman to an island where a tribe of people has been discovered with no previous contact to the rest of the world. The first salesman reports back to head office, "Bad news, boss. Nobody here wears shoes". The second salesman calls his company, and excitedly explains, "It's an amazing opportunity. Nobody here wears shoes".

Dona Ferentes
April 14, 2015

Well, looking at today's The Australian 14 April 2015, it would appear "fintech" is flavour of the month

"...companies look at tipping funds into fintech start-ups, talks of $50 million-plus are common as opposed to $1m-$2m,” said AWI Ventures accelerator manager Simran Gambhir. Australia is now home to about 400-500 fintech start-ups with full-time workers, going by Mr Gambhir’s estimates.

Paul
April 14, 2015

Graham,

I agree with your point that a fundamental issue/constraint is behavioural - from a user perspective.

My guess is that the robust responses received to your article are from a demographic that (i) is highly engaged with their financial situation (ii) well educated from a financial literacy perspective and therefore comfortable making asset allocation decisions (iii) not 18-25 years old or (iv) commencing their first job.

Various data on "stickiness" of FUM (as well as retail deposits) confirms the lack of engagement by the vast majority of superannuants and there generally needs to be a high level of dissatisfaction with current arrangements/performance to switch.

It would be interesting to know for those that established SMSF's when they made the decision to do so (and let's also exclude those that use SMSF for parking their business interests/assets).

The key is to obtain engagement, which means accepting a degree of personal responsibility, as early as possible. For some this may remain quite daunting until they believe they are sufficiently capable.

Tom Jones
April 13, 2015

Robo advice will take over the world, I'm just glad that someone in Australia has finally woken up to it. I for one know that I will be telling my children and spouses (yes multiple), to invest in a Robo within the coming year.

Steve Manning
April 13, 2015

If the figures are right 80% of Australians don't have an adviser and this is unlikely to improve with CBA, NAB and Macquarie dragging advice down. DIY advice may get a lot more people managing their affairs better. Many will evolve and need more complex advice that could be beyond "Robo Advice".

Bob Dawson
April 13, 2015

I tend to agree but one thing these disrupters just can't do, is hold the hand of a Widow, or nurse a client through the tough times when the arise. All well and good to have computers do things but with 68% of Australian without income protection I can see that the Insurance sales websites worked a treat in encouraging a higher take up, not!.

I think a good way to approach this is this: Just try ringing Google or Apple, they don't have phone numbers, why? because their business model is not about service it is all about product only, they frankly just don't care if we become clients or not because of economies of scale, one leave - one joins, doesn't affect them at all.

Very hard to replace the personal high touch that good advisers provide.
Final thought, what happens when the next GFC MK11 hits, just can't see a computer being there for you.

Charles Moore
April 12, 2015

check out charles schwab new robot advisor offering.. returns well above any index and cost is just trades in some cases..

Not in aust yet..but ETFs lagged by about 5 years..

Steve Manning
April 12, 2015

I may be banging on a bit but remain convinced the banks (and AMP) will steer well clear of any innovation that forces them to compete on costs, features, benefits etc. Vertically integrated advice is the antithesis of letting people make their own choice on merit.

Innovation that disrupts their business model will probably come from a software house. I have no doubt 'disruptive innovation' isn't far away.

Nick Hofmann
May 23, 2015

There are companies listed on the ASX which are going to disrupt international remittances/instantaneous, secure money transfers at half the fees the current providers are charging. First adopter, could be the next Uber/AirBNB. In my opinion/do your own research of course.

Andrew Wakeling
April 11, 2015

Surely at some stage soon we'll get into serious disintermediation for the mass market? We can all buy cheap investment management and insurance over the internet and there is plenty of easy stuff to read. Hopefully common sense will prevail and we'll get simplified regulations and easier access. We should all be able to run vastly simplified 'micro SMSFs' with all necessary form filling consolidated into our personal tax returns. Who will the 'winners' be? Apple, Google, HandR Block (and their like) and Vanguard are all well placed to be disruptive. The biggest winner should be the consumer.

Graham Hand
April 11, 2015

Hi Andrew, yes, my instinct is also that most industries go through significant change over a ten year period, especially one as prone to technology innovations as the finance industry. I think the main issue here is that the vast majority of people are not engaged with their superannuation, at least until they approach retirement age. As my article says, 90% of people choose default funds and 80% don't have a financial adviser. Interesting article here from The New York Times about a US company called LearnVest which brought 'financial planning to the masses' in 2009 at a very low price, but after investing $75 million of venture capital, has only 10,000 clients and has now sold out to a bigger player: http://www.nytimes.com/2015/04/04/your-money/why-paying-for-financial-advice-makes-sense.html?_r=1

Graham Hand
April 11, 2015

Well, Bill, I agree with the simple point made by Boyd, the 'retired CFP'. Many SMSFs have one dominant trustee who runs it and makes all the decisions, even though there may be others on the Trust Deed. SMSF investments can become quite complicated over time with unlisted investments, properties with LRBA, alternatives, annual rebalancing, etc. Every trustee should consider what will happen over time if the main trustee loses some cognitive functions. Quoting directly from the World Health Organisation (http://www.who.int/mediacentre/factsheets/fs381/en/), "Over 20% of adults aged 60 and over suffer from a mental or neurological disorder". And of course 60 is not old - the problems are likely to be much greater for 80 years plus.

Bill
April 11, 2015

Did not take long for a CFP to introduce "scare tactics".

Padded with well meaning, sincere sounding language, nevertheless, the message is crystal clear. Preying on the health (mental capacity) of the elderly whilst besmirching their offspring. How low can one go.

Prudent management & regular meetings along with proper SMSF estate planning addresses the issues raised; except for the, "honest handling of the affairs", as that thorny issue may affect any wealthy individual or estate at any time.

It has not always been the offspring that have left naïve investors bankrupt.

There have been some very high profile cases in the media in the last couple of years that have destroyed retirement funds. Pity the poor souls who trusted these advisors.

The one saving grace is that the SMSF at least left a nest egg to squabble over.

Cloe Reece
April 11, 2015

Great article Graham and scary to think what will happen if we don't start creating the space to think creatively and innovate, perhaps we could learn a thing or too from Google about how they create space for creativity at their workplace.

Boyd
April 10, 2015

Hi Graham,

As a retired CFP, I have enjoyed your two articles on the future of the (superannuation) industry.
While I fully understand the rise in use of SMSFs (I also recommended them to some clients) I find one aspect of their use which is rarely discussed. That aspect is the question of what happens when the trustee(s) of the fund age and possibly lose interest or mental capacity to properly look after the fund, or die and leave behind a spouse who often has no interest in finance?

I saw quite a few clients in such situations and the expenses required in sorting out the mess (after years of neglect) can become very expensive thus offsetting some of their earlier savings. Can ageing parents with possibly large sums of money in super always rely on children (if they have them) for honest handling of their affairs? At least an externally managed platform can avoid or reduce such problems.

Steve Darke
April 10, 2015

Hi Graham,
I enjoyed your article but I disagree with this statement:

"Industry funds have only one type of stakeholder, their members."

I would argue that the executives and senior management of industry funds are also a stakeholder and arguably the ones who benefit the most from the growth of industry funds. If industry funds are 'run only to benefit their members' then why do they advertise? How does sponsoring a football team benefit the existing members of an industry fund? Why are industry funds so keen to attract additional members? They may argue that it allows them to spread fixed admin costs over a wider base, but I can bet that the salaries of management and execs at industry funds bears a close correlation with the amount of assets under management.

Kenny Thing
April 10, 2015

Very good read. A sharing economy business model (Uber type) works as long as there are customer pain points and if technologies can alleviate this then why not? The challenge is if the market is ready for it.

Thanks for sharing this article Graham!

Steve
April 10, 2015

The astonishing growth and success of SMSFs show that ordinary Australians have an appetite and competency for managing their own retirement funds. This is normally done at a fraction of the cost of a manged fund.

Online tools that are easy to use will attract others who want to manage their own funds.

Its strange that there isn't a single affordable, easy-to-use tool on the market allowing the man in the street to measure and choose funds.

Is this because the big institutions don't want to compete on costs and features preferring to rely on their distribution force to offload their products?

That tool will arrive and hopefully end (or at least erode) vertically integrated advice.

Tim
April 10, 2015

In relation to fund mangers, when the investing public really grasps the idea of absolute returns versus the index hugging the majors will feel the pinch. For the majority of the asset management industry to hide behind an index as their performance bench mark is an amazing marketing achievement.

There are many terrific asset managers who benchmark against say a 10% return. Therefore it seems crazy to consider a manager who thinks that being down 25%, for the year when the index is down 28%, is an out performance. What hoaxes! Index hugging managers wouldn't know risk if it hit them between the eyes, which is what will happen if the Uber of fund managers takes hold.

Graham Hand
April 10, 2015

Thanks, Kym, an excellent comment. Indeed, $100 million does not fit the definition of 'low capital needs', but just because a couple of market leaders in the US have raised that much does not mean it is required for a decent business. Also not sure how much of that money is pocketed by the initial owners and how much goes into the business.

But either way, my reference was that it is possible to achieve a lot with little capital. Many of the Australian companies I mention rely more on the 'sweat equity' of a couple of owners, and the capital needed for a functioning business is modest, less than $500,000, often raised from their own resources, family and friends. As long as one of the principals is a competent programmer, much can be achieved at relatively little cost, especially with other skills outsourced to India or via online services such as Elance oDesk.

I have discussed fund-raising with some fintech businesses already operating and it's a surprise how little capital they have gone through. Walk through some of the tech hubs in Sydney where dozens of people with an idea are sharing space and see how good their offer looks on a relative shoestring and a hundred hours a week of effort.

Kym Sheehan
April 10, 2015

Out of interest Graham - how many of those fintechs have paying customers? Also a hundred hours a week of effort is going to seek a payoff at some stage...

Graham Hand
April 10, 2015

Hi Kym, obviously I cannot give private information but there are income-earning businesses with paying customers in the fintech space in Australia which have reached a fully operational stage with relatively little capital and a lot of effort by the principals. My point is that this is possible when the owners of the business put in long hours and have the right skills - and of course they expect a pay off at some stage.

Kym Sheehan
April 10, 2015

Interesting article...although I note that Wealthfront and Betterment have each raised over US$100 million in capital to do what they do. I'm not sure that quite fits the definition of 'low capital needs'.

In terms of costs, per recent Form ADV filings with the SEC (2 March 2015) Wealthfront has over $US2 billion AUM in some 25,723 accounts, or an average account of $78,335. Charging a fee of 0.25% per annum on balances over US$10k (because first $10k of each portfolio is managed for free) means an annual income of around US$4.4 million (fee per account is around US$171). With 72 employees (excluding clerical workers) and ignoring any other business expenses, this means around US$61k salary costs per employee. Add back in the other expenses and this figure drops. Remember the employees in these firms are financial services and software developer employees...ie not the cheapest labour on the market.

So if the US experience is anything to go by, these firms have capital needs that don't exactly qualify as low, given the revenues generated, and have to carefully manage how they go about achieving scale.

Bill
April 10, 2015

Hi Greg

You will not have to wait 10 years to find out who will have more than 10% market share.

The 800 pound gorilla in the room is the SMSF industry, which is not invisible, only getting bigger by the day with more than 1 million members, see chart above.

The superannuation industry is terrified at the growth of SMSF.

They make it sound very difficult to run and administer a SMSF. Their scare tactics are not working as is evidenced by the staggering growth of SMSF in Australia.

I have run my own SMSF for 15 years and have outperformed the top funds in all but 1 year; 2008 GFC. My all up fees are 0.01% of the fund balance.

I like your example of LG, Samsung and Toyota because it demonstrates that people spent more time researching products, trying to save $100 on a new phone/android and $500 on a car and seeing what's best in the market.

However, the same moms & dads hand over mega $$$$, their life savings, to a financial adviser with little or no research. They could be saving thousands in fees as well as getting franking credits back as a tax refund.

The industry heavyweights will fight tooth and nail to secure their share of the ever growing superannuation pie.

Consider a retirement super cheque of $1 million invested with a 1% fee; it generates $10,000 in fees for the fund whether or not the fund outperforms the market or it grows or declines.

A fee of 1% appears small, but...

Consider that your fund earns, say 5% in income, reasonable in todays market, which equates to $50,000.

Now compare that a $10,000 fee equates to 20% of your income earned and all of a sudden you may feel that you have been gouged by a bull; yes a lot of bull.

If the advisor had told you that they may charge a fee of 20% of your earnings, would you still be so keen to sign on the dotted line?? My guess is No !

The rise and rise of SMSF is a given, unless the government intervenes. The longer they wait the more difficult it becomes as members of a SMSF are voters.

To quote Mel Brookes, "It's good to be the king". ( or 800 pound SMSF gorilla.)

Tim Richardson
April 10, 2015

Thanks Graham.
I think that the winners over the next decade will be those who tap into investors' desire for greater control and an investment strategy that more precisely reflects their individual need for return and appetite for downside risk.
Therefore not the big five providers with SMSF advice strategies that are generic, product based and expensive.
Super plans that offer the widest choice of strategies and product providers for a low management fee will do well - regardless of the retail or industry type. Such funds offer a cost (and hassle) advantage over an SMSF for many investors up to a fairly high threshold - who do not wish to invest in direct property - this would thus limit the growth (in terms of the number of funds but not fund size) of the SMSF sector much beyond the current level.
Similarly firms that empower the self-directed investor with platforms, investment products, personalised content or advice that is insightful and truly independent will do well.

Greg Einfeld
April 10, 2015

Thanks Graham for another thought provoking article. You conclude with "no single new party will have greater than 10% of the market by 2025". You could easily remove the word "new" from this sentence. In fact the only organisation that could possibly have 10% share of super in 2025 is Australian Super, as long as we continue to measure market share the way we do today. By then Australian Super will have taken over a number of other funds As long as industry funds don't have to compete for SG contributions they will be at a big competitive advantage.

The banks and AMP will continue to lose market share slowly, resembling the boiling frog. One day they will wake up and wonder what happened. But it will be to late. And even if they realised the extent of their issues now I'm not sure there is much they could do about it.

Changes in market share will happen more slowly than other industries due to the long term nature of relationships with a superannuation provider (although superstream should reduce the barriers to switching). Consider this:

For super we measure market share by assets under management. So the organisation with the largest market share is the one that was most popular (signing up most new customers) say 10 years ago. All they have had to do for 10 years is hang onto their customers. Their AUM grow due to investment earnings and super contributions - even if they aren't taking on any new clients today.

Compare this with televisions (or cars, or any other good you tend to keep for a long time). We measure market share by what is purchased today. So Samsung and LG and Toyota have the highest market share. Yes it is probably true that most houses have a Panasonic or Sony TV or Holden because they were the most popular 5-10 years ago.

If market share in super was measured by sign-ups rather than AUM then we might well find that there is a new provider in 10 years that does have more than 10% market share. Who will they be? We don't know because they don't exist today.

Bill
April 10, 2015

Hi Chris

Agree with you on this issue and I am not able to give advice, nor do I wish to do so; I merely want to share some personal experiences.

Many years ago your local bank staff did just what you seek. From the "dollarmite" school bank book, credit card, your first home, investment property, business loan and retirement investments were all handled by your local bank manager/staff.

Often times the bank manager looked after 3 generations of the family at the one branch and they knew their customers very well. There was mutual respect and a relationship.

This model was destroyed when everyone had to have a university degree just to talk to a customer about finance/investments, thus the local branch became purely a referral point.

The graduates, although very well paid, became incentivised with bonuses et al and the customer became a number only. A number as to how much commission can be generated by any means.

The same goes for the stock broker and the stock market/housing spruickers.

The reason why so many SMSF are established is because the punter has finally woken up to the BS.

Fair dinkum, a monkey with a dartboard outperformed the stockmarket "gurus" in a recent BBC investment exercise.

Finally, people need to take ownership of their situation. No point complaining after you have handed over hundreds of thousands of your hard earned cash to a total stranger.

Educate yourself about finance/superannuation and get a basic understanding of the system; then sit down and work out your level of risk tolerance.

The best person to look after your money is ......YOU !

If you abdicate responsibility then you wear the consequences.

This is not advice just my old fashioned common sense approach.

Graham Hand
April 10, 2015

Thanks, Chris, I agree the general subject of 'wealth management' is much broader than covered in my article, but I used superannuation to frame the topic so the length did not get out of control. We could write a book on the subject of roboadvice alone, given all the new developments underway.

Chris
April 10, 2015

I find it interesting that any discussion on the future of wealth management is ultimately a discussion about the future of the product that is superannuation.

The way I see it, wealth is broader than Super and when you take a customer lens to it, then there is the opportunity to use technology and engage with customers sooner and help them manage their wealth throughout their whole life, whether that be helping someone save for their child’s education, buying their family home or investment property, saving for regular holidays or saving for retirement.

I see the opportunity in the ‘Advice’ spectrum, engaging customers across their wealth goals.

 

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