The operational costs embedded in super come from the multiple parties involved including trustees, super administrators, insurers, custodians and regulators.
For instance, for those invested in Australian direct equities through a super fund, there is often a custodial layer between the member and the ASX, which is opaque and costly, and limits the range of corporate events the member is eligible to benefit from such as share buy backs and placements.
It has been reported that the ASX is set to unleash large scale disruption and innovation that will bring about savings and improved investor returns. This ASX innovation will allow for super funds to directly connect to the ASX, bypassing the layers that can cause data errors and additional costs. While some progressive super funds will approach this opportunity at an omnibus level, there is also the current opportunity of the HIN member level direct connectivity.
WealthO2’s Super Simplifier is among a handful of retail super funds that use member level HIN. HIN-based super allows the member to have full transparency on the underlying assets held on their behalf, and eligibility to all corporate events. The ASX innovation will add the benefits of enhanced corporate events management to this model. Using the member level HIN approach, as opposed to the traditional custodial intermediary layer, means the asset selection and elections can be made for the benefit of the member’s returns, and member level franking credits for pensioners. It’s the advent of technology and data connectivity that has allowed for this disruption today, and the ASX distributed ledger will only enhance this going forward.
Technology is also disrupting the value chain of advice. While the banning of grandfather commissions will remove hidden fees from the value chain, technology is removing entire layers. Take the same benefits for HIN in super and apply this to ASX holdings in a client’s portfolio. Using a HIN-based platform, solutions like WealthO2 remove the costs of the custodian and create transparency and full event eligibility for the investor. What’s more, cash and term deposits held outside a custodian, in an investors name, allows for greater protection from bank failures and removes the ability to clip interest on cash (a practice that is all too common and is to the detriment of end investors).
Another example is the removal of “shelves” that traditionally hosted fund managers and more recently SMAs at an increased cost to the investor. The investment option shelf (e.g. balanced option) within a super fund is an opaque layer that also potentially increases costs.
WealthO2 has removed these shelves, allowing access to any professional managers that the adviser’s research recommends. Coupled with holding limit APL controls, this ensures trustee and asset selection compliance. In removing these shelves, a saving of 5-10 basis points can be gained by the investor.
Why haven’t these layers been removed sooner? Only recently has the cost of operations been significantly reduced by using technology for the administration and to ensure data quality through automation of these validation tasks. Traditionally these functions involved multiple systems and staff. This in turn allows for solution providers’ revenue models to move away from “clipping the ticket” within the unnecessary layers in the value chain. The “shelves”, for example, derive significant revenue for some platform and industry super funds. The custody of clients’ assets allows for additional fees for many providers.
Ultimately, it is technology that has enabled this disruption – with a combination of the better managed data, as well as the ability to derive profit from a much lower revenue base. And that is to the benefit of advisers and their clients.
Shannon Bernasconi, managing director, WealthO2
