FEATURE | Platforms | The investment supermarket

Grab a shopping cart and enter the investment supermarket. The shelves are stacked - an Aussie large-cap fund here, an ETF there, a fixed-income fund somewhere near the back, past the alternatives nobody quite understands.

There is an estimated $1 trillion dollars sitting across them, platforms have carved out an important place for themselves in the wealth industry: an online supermarket distributing investment products at scale.

Matt Rady, who now runs BT Panorama, a platform with $150 billion in funds under administration, recalls his time at Macquarie in the mid-1990s.

"We sat around and we said, 'Okay, well, are master trusts and wraps going to take over the world?' And strategically we made the decision that they were, and as a consequence we should be in the supermarket business," Rady told a recent industry event.

Master trusts pool money into a single basket giving the investor a share of the fund, whereas a wrap account is for investors looking for more flexibility, letting them select exactly what they want, with each investment held in their own name.

While platforms can serve everyone from mum-and-dad investors to more sophisticated high-net-worth investors, all the capital is not the same.

Superannuation, which accounts for around $397 billion of assets sitting across platforms, according to APRA, brings a strict regulatory obligation along with it to safeguard the retirement savings of Australians.

That safeguard comes in the form of the superannuation trustee - a separate legal role from the platform itself, responsible for acting in members' best financial interests and exercising due diligence on the investment options it puts in front of members.

It's a safeguard that, ASIC says, didn't hold up in the case of the Shield and First Guardian failures.

Around 11,000 Australians lost more than $1 billion dollars of their retirement savings in the collapse of managed investment schemes, which were made available to investors through platforms.

While Treasury notes in its Enhancing member protections in the superannuation system review the poor conduct in the collapse involved an "interconnected chain of entities," including lead generators and financial advisers along with concerning super-switching practices, the role of platforms has also come under scrutiny.

ASIC in its latest review of trustees noted they are not doing enough to protect their members savings on platforms, finding "stark" gaps in the monitoring of harmful advice fee deductions and unusual fees and investment patterns.

ASIC commissioner Simon Constant said: "Some trustees failed to establish basic protections, like looking into an advice licensee's business model before they are onboarded. This is a clear breach of trust."

ASIC currently also has cases in the Federal Court against Equity Trustees and Diversa Trustees, both trustees-for-hire, externally licensed companies appointed to act as trustee for a fund rather than the trustee sitting inside the same business that runs the platform. ASIC alleges both failed to exercise the same degree of care, skill and diligence a prudent trustee would.

Diversa provided trusteeship for super accounts on Praemium, a platform administering around $74 billion of funds. Equity Trustees did the same for NQ Super & Pension, a division of the AMG Superannuation Fund.

Macquarie and Netwealth, by contrast, kept their trustee in-house. Both have admitted to failures in due diligence and already compensated members with $321 million and $100 million, respectively.

Last year, the prudential regulator in a letter to trustees also called for them to lift standards when onboarding products on platforms. Since then, it has pulled up multiple trustees, including HUB24 Super Fund's trustee HTFS Nominees, slapping additional licence conditions over governance of investment products on the platforms.

Treasury's recent consultation says implementing obligations targeted specifically at platforms requires a legal definition precise enough to identify which products and trustees those obligations should bind.

At present, Treasury's own working definition treats any superannuation trustee of a fund offering a platform product as a "platform trustee". But it notes no such legal distinction currently exists in the law, consulting the public to settle on one.

A clear and accessible definition, it says, would let the government target reforms more precisely at the parts of the system most closely associated with the primary issues highlighted by the Shield and First Guardian collapses.

The industry, however, argues there are sufficient regulations in place and what is needed is better supervision and enforcement of the frameworks that already exist.

AMP group executive for platforms Edwina Maloney says platforms play an important role in providing adviser-led access to a broad investment choices, and that role remains critical given the differing needs of Australians. AMP's North platform administers approximately $85.5 billion in funds.

"Platforms already sit within a multi-layered governance model - filtering out unsuitable options, with researchers, licensees and advisers applying further scrutiny - so the objective should be to enhance those controls, not duplicate them in a way that unnecessarily limits access," Maloney says.

Maloney adds platforms focus on screening out unsuitable investment options, with advisers then selecting investments from the platform menu that are appropriate for their clients. "We're really looking for broad choice but we're a safe broad choice environment, a safe supermarket to go in where you've got the health ticks on the products in there if you want to think about it that way," she says.

Praemium chief executive Anthony Wamsteker adds if the regulator keeps adding on accountability and duplicating obligations across every party, it will just add to the cost.

He notes there is a need for platforms to keep upgrading their technology to keep pace with increasingly sophisticated investment portfolios.

To meet the demand, Wamsteker says it's important for platforms to manage it all seamlessly - understanding the risks being taken and providing proper portfolio reporting without driving costs up too much.

"While we are cautious before we allow a product onto the platform, we're not judges of the investment merits nor should we be because we're not financial advisers...If you create a clear distinction around the platform as a service provider, it allows platforms to get on with doing that very well for as low a cost as possible," he says.

Praemium is currently being dragged by its trustee Diversa in a cross-claim stating if it does lose the case against ASIC, Praemium is the one who should compensate it for the member losses.

Boutique investment manager SG Hiscock & Company (SGH) has multiple funds on different platforms, including AMP North, BT Panorama, Macquarie, Netwealth, HUB24 and Praemium.

SGH head of distribution Anthony Cochran says on average it can cost around $10,000 per fund to get onto a platform, and SGH ideally seeks to put its funds on half a dozen platforms to broaden reach and open up channels of
fund flows.

While he notes the fees for platforms are reasonable at this point, he wouldn't like to see them go up too much more than where they are at now.

"It depends on the regulatory costs that go within our industry, right? Regulation has been a big feature of our industry for many years now, and the more regulatory cost we get, the more cost is built into the business. That cost gets passed on all around," Cochran says.

Wamsteker advocates for a single point of accountability noting it is more efficient and puts the onus where it should be.

"If you make all the parts of the chain do the same job two or three times, double checking what others have done, you might say it makes it a bit safer, but it can diffuse accountability too," he notes.

"There is a tendency for people not to take it quite as seriously if they think somebody else is going to catch the problem in the end."

He points to research houses which have the scale to properly assess risk categories and argues that in the most efficient version of the system, that's exactly where the job should sit.

However, at present we don't live in the most efficient version of the system and ASIC is also suing research house SQM Research over its favourable rating for the Shield fund. ASIC alleges the research house failed to obtain information needed to properly assess Shield and did not consider the inconsistencies in information it received when rating the fund.

MLC Expand chief executive Liz McCarthy says the collapsed investment funds would not have moved past its initial screens as they have multiple screening criteria and doesn't rely just on research house ratings.

She adds the platform also watches for red flags such as a spike in revenue tied to any product on the platform, broad adviser support and targeted specific watchlists even after onboarding a product.

McCarthy notes it is important to have alignment between the trustee and the platform to look after the member, pointing to her direct line with Danielle Press, the independent non-executive chair of the board of IOOF Investment Management, MLC Expand's trustee. Both firms sit under the now-delisted Insignia Financial.

Viola Private Wealth executive chair and adviser Charlie Viola says ultimately, platforms can't be blamed if an adviser makes a bad decision for a client and platforms are there only as an administration and integration layer.

"It's important that if you're going to have these platforms, we don't expect a platform to act as a gatekeeper for investments. That's the adviser's job, that's the licensee's job, that's the job of our investment committee to make sure we're only ever approving good assets and investments that people should actually be invested in," Viola says.

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