Platforms and wraps: Benefits and downsides

If you’ve ever invested through an adviser, chances are they mentioned platforms or wraps. If you dozed off at that point, who could blame you.

Perhaps you snapped to attention after parting company with your adviser and finding you were now an ‘orphan’ on an investment platform.

Or perhaps you’re just a curious investor.

If a small part of you would like to know more about platforms and what they can and can’t do for you, read on.

What’s a platform?

An investment platform is an administration service that offers an extensive menu of investments wrapped up in a single account. 

Many now offer separate products for superannuation, super pensions and non-super investments, to comply with different regulations and tax treatments.

Platforms have been around for decades but have evolved to offer greater individual control as technology has developed. By way of background:

• In the early days, master trusts were the go-to platforms. These only offer investments in managed funds and your money is pooled with other investors. Investments are held in the name of the trustee, with all income, tax and franking credits attributed to the fund before being apportioned equally to each investor via the unit price and paid out as a distribution. Franking credits are also incorporated in the unit price of your investment. The underlying investments are not portable, so if you want to leave the platform you’ll have to sell and possibly trigger a capital gain you’ll be taxed on.
• The next innovation was wrap accounts, which are still popular. These offer shares and other direct investments as well as managed funds. They’re still operated by a trustee, but there’s a higher degree of personal control. Fees and taxes are unbundled from the unit price and disclosed separately. Your income, expenses and franking credits all go through your individual cash account within the wrap. Super wraps are wraps designed to comply with super rules. Assets are portable so you can change wrap services.
• The new kid on the block is the separately managed account (SMA). These platforms offer investors even more control and the ability to customise. Instead of investing in managed funds where your money is pooled with all the other investors in the fund, you can choose from model portfolios selected by the fund manager. You have direct beneficial ownership of the shares in the model portfolio, which allows you to manage tax to suit your circumstances and the potential to increase after-tax returns.

Who offers them?

Almost all, if not all, financial advisers use platforms to reduce the time and cost of building and administering investment portfolios for their clients. But it’s also been the case that many advisers were owned by the financial institutions that provide the platforms. However, this traditional nexus began to break down in the wake of the Hayne banking royal commission. Many advisers have since left the business and the big financial institutions have been distancing themselves or exiting wealth management entirely in a trend dubbed ‘Wexit’ (wealth exit) by some wags.

The main beneficiaries of this trend have been specialist platform providers such as Netwealth and HUB24 which have experienced the fastest growth in the industry in recent times.

Nevertheless, big institutional platforms still dominate the market, led by BT Panorama and Macquarie Wrap.

Despite ongoing consolidation, there are still more than a dozen major platforms in the Australian market. Other big names include Colonial First State (CFS) FirstChoice and CFS Edge, AMP North, Insignia Expand (the rebadged IOOF) and Mason Stevens.

All retail super funds use platforms, as do a growing number of industry funds that allow members to invest directly in listed investments, term deposits and cash.

What are the benefits?

The potential benefits of platforms are:

• Investment choice. Depending on the platform, you typically have access to ASX-listed securities including exchange-traded funds (ETFs), margin lending, more managed funds than you could ever want, a wide range of term deposits and cash facilities. Often there is access to investments not normally available to individual investors or those with smaller sums to invest in a single investment. You can also hold property in a wrap account (but not in a master trust).
• Simplicity and efficiency. Platforms gather your investments in one place. At the end of the financial year, you receive one statement with all the paperwork, corporate actions, tax treatments and cash flows covered. You also receive regular updates and online access to your portfolio.
• Access to investments that would normally be outside your reach. Wholesale and specialist funds often have a high minimum investment such as $500,000. You may be able to invest via a platform for a much lower upfront amount and take advantage of the lower fees for wholesale investments.

In some ways, platforms are like an SMSF without the legal and administrative hassle. You can choose your investments, typically with the guidance of your adviser, and pursue your personal investment strategy.

Industry trends

Like every aspect of investing these days, technology is transforming the platform market.

In its most recent Platform Benchmarking Report, Investment Trends highlighted greater use of technology to improve functionality, with a growing shift to client-level administration. There is also a sharper focus on retirement solutions.

Recep Peker, managing director of financial product research software group SuitabilityHub, says platforms are rapidly modernising their digital capabilities. Increasingly, advisers can place more instructions online and track tasks in real time, reducing calls to the platform and written documentation, all of which saves time and money.

While most platforms offer similar core capabilities, Peker says the focus is now on differentiating product offerings with innovative features, often targeting certain types of clients. For example, Netwealth and Praemium target high net worth individuals, while others such as CFS Edge and HUB24 are targeting ‘mass affluent’ Mums and Dads with zero administration fee products aimed at addressing advice affordability and competing with industry funds.

Peker offers the following insights into recent platform innovations:

• BT Panorama is leading the mobile first approach with the strongest mobile offering, reducing paperwork and administrative friction for clients. It also offers strong integration with Westpac which can streamline processes for Westpac customers.
• AMP North is a leader in the retiree segment with its MyNorth Lifetime suite of products providing guaranteed income for life with the flexibility of a wrap account while also maximising Age Pension entitlements. Learn more about which super funds offer income for life.
• Macquarie Wrap is king when it comes to cash, with almost half of all SMSFs opting for a Macquarie cash management account. Peker says Macquarie also has a heavy focus on cybersecurity, protecting clients from fraud and scams with multi-factor authentication on its app.
• HUB24 is working to become the platform for everyone. While traditionally focused on wealthy individuals, new products like HUB24 Discover offer a more limited menu of SMAs with zero administration fees for lower balance clients. It is also aiming to be a one-stop-shop for SMSFs, making the process of establishing a fund and investing easy and cost effective, especially for younger clients. For older SMSF clients with Mum and Dad funds, it is providing cost effective advice to give a surviving spouse an alternative to winding up the fund, which can be costly and have adverse tax outcomes.
• CFS Edge is another fund addressing advice affordability with zero administration fees. It also allows client accounts to be divided into sub-accounts, making it easier to implement strategies such as the bucket strategy for retirees. Not having to set up multiple accounts also helps reduce administration and costs. Read more about managing retirement income with a bucket strategy.

Moves to reduce fees and other costs to attract clients with lower balances is also a pre-emptive attempt to ward off competition from industry funds. Peker says industry funds are targeting advisers and investing in advice portals, offering a lower cost alternative to platforms for clients with simple advice needs.

Over the past 5 to 10 years there has been a gradual increase in people on platforms who were previously with an adviser but are no longer advised – known as ‘orphans’ or PACs (previously advised clients). This has put pressure on platforms to offer client portals so these PACs can continue to monitor and manage their investments themselves. To date, Peker says platforms have been reluctant to offer self-service more widely because of the increased marketing and other costs this would entail.

What’s the downside?