The largest platform in Australia charges zero holding fees, and facilitates access to cash products where investors receive interest above RBA. This starkly opposes other ‘wrap’ platforms where investors are given a haircut to reduce the platforms’ credit exposure to the investor.
The platform I’m talking about is, of course, ASX CHESS and planned upgrades will further erode the quintessential wrap platforms' ability to persist with outdated technology and layering fees on top of fees.
The ASX’s project to upgrade CHESS with a new Digital Ledger Technology (DLT) messaging protocol will lead a new age of innovation in financial markets, which will see absolute digitisation through to the end investor.
To understand why, we must go back a little in history to the dawn of digitisation, when paper share certificates were replaced and the ASX initiated CHESS, which was, and still is, a unique capability.
Back then, most of the world moved to electronic registries and sub custodial capabilities, where a bank held the assets and end investors became what are called ‘beneficial owners’. Here in Australia (and NZ) we did things differently, replacing the share certificate with an electronic version called a Holder Identification Number (HIN), with the custodian or central counterpart being the ASX through its CHESS facility.
At the same time Australia also initiated compulsory superannuation, and managed funds flourished. At the time, managed funds were all unlisted vehicles which had to be held by a custodian, so banks devised the concept of the ‘wrap’ platform, where all assets could be consolidated under a custodial arrangement and included consolidated tax reporting.
This made sense in the 1990s, because this custodial layer added administration benefits and scale that individual direct holdings (HIN) found difficult to replicate. However, it also introduced several intermediaries between the investor and their investments, with each one adding extra cost. The pricing, security and transparency benefits of holding listed securities in the investor’s own name, on HIN, were lost.
Fast forward to today and lower cost listed fund structures, particularly ETFs, give advisers asset allocation capabilities that can use 100 per cent listed investments. Advances in technology and SaaS solutions mean investors' assets, even if they are both listed and unlisted, can be consolidated for tax reporting purposes. As a result, we have a firm belief that any platform based only on holding assets via a custodial capability is using obsolete technology and penalising the retail investor. The platform of the future should have the capability to hold and report listed securities on HIN, alongside other assets (global equities, managed funds) via custody.
And this gets us to the crux of why the ASX CHESS upgrade is so important.
Administering individual investors’ holdings on a security-by-security basis (as against bulked in a single custodian account with sub holders/beneficial owners) has been burdensome, and tested legacy technologies. As part of the ASX CHESS Replacement project, data will become more readily available, in a format more easily ingested by fintechs developing efficiency solutions.
There has been speculation in financial markets around what the new wave of product providers will look like, particularly in the superannuation sector. Much of this speculation has been based on providers having more efficient technology connecting all the existing components of a traditional superannuation provider – manager, operations, administrator, custodian, trustee, insurance provider. But imagine a world where many of these could be removed completely.
A world where there was a manager that did provide value through portfolio/asset selection, but all the individual securities were held directly in the investors’ names, with a single custodian/administrator/operations/trustee provider ensuring the investors’ portfolio was always in line with the manager’s mandate.
A capability that meant when an investor wanted to move from one manager to another, it would be a simple case of rebalancing the different securities from one portfolio to another. Core securities would always remain in the investor’s name rather than the current laborious and costly process of redeeming from one fund to another where all the securities are sold down, before being reinvested in a new fund where many of the securities are likely to be the same. Technology strips out all those unnecessary fees, allowing savings to be passed through to the consumer.
New capabilities in corporate actions and registry management will further streamline the process soon. There will no doubt be innovation and development we are yet to envisage, facilitated through more open access to data.
While the ASX CHESS upgrade project has now been delayed, along with everything we are experiencing in this new COVID-19 world, the writing has been on the wall for some time given the complexity and buy in required from all participants it touches across financial markets.
Notwithstanding this road bump, we will no doubt hear more noise from those service providers running obsolete technology and platforms that stand most to lose from this initiative.
The ASX CHESS upgrade project will eventually lead to a world where investors are able to hold their listed securities directly no matter the fund structure or manager. As a result, the various layers of fees and services that have been built up around the industry will be rationalised, delivering more cost-effective solutions and ultimately better returns for end investors, which is really what the industry should be all about.
David Ferrall, chief executive, FinClear
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