Regulation, examination and reflection have always been agents of change, and for Australia’s financial services sector right now, that agent is the Royal Commission.
Yet, where this inquiry feels at odds with the times is because many of its findings are the consequences of old entrenched systems that have effectively masked risk and inefficiency.
Industry empowering and redefining concepts such as network technology, agnostic platforms, real time scalable processing, centralised standards and system transparency have all been relatively slow to find their place in financial services, allowing bad practices to linger and investor outcomes to languish. Much of the Commission has in fact focused on processes that are well past their use by date, yet it is in these rare moments of intense examination, where an industry is forced to reckon with its faults and failings, that it can reset its course and break new ground.
Change in financial services is clearly afoot, with banks accelerating plans to detach wealth management from their core banking business, allowing new wealth businesses to visualise their independent futures. And visualise big they must if they are to keep pace with a superannuation system far from its maturity point. Platforms, investment managers and administration firms need consider how they deliver services such asset allocation, investor engagement, education, protection, disclosure, reporting, compliance and governance, as the system morphs towards its predicted size of $9.5 trillion by 2035. In short, the investment sector that is largely defined by its people and processes, is likely to face a resources conundrum, potentially exacerbated by ever-increasing regulations, local and international.
Australia’s financial services sector, our biggest industry GDP contributor of around $140 billion annually, has been comparatively fortunate compared to other markets. It weathered the financial crisis that impacted almost every other global market and continued to grow. Where the financial crisis has driven greater financial service regulation and protection in these global markets, the Royal Commission seems to be the biggest catalyst for higher levels of control and oversight of our financial services and systems.
Looking overseas – the UK is ahead of the curve, having introduced the retail distribution review (RDR) in 2012 to achieve greater levels of transparency and fairness in the UK investment industry. Perhaps the biggest outcome from this was the removal of inducements payable to advisors which has fundamentally changed the structure of wealth advisory and management – not dissimilar to FoFA though applied on a far greater scale. More recently, MiFID II has emerged from the EU, arguably not going as far in terms of governing advised financial inducements which still exist in Europe, but placing greater onus on the fund manager as to the appropriateness of who each fund is sold.
Anxiety is growing around where the Commission’s inquiry will take us next, with many anticipating that fund performance will be one of the most likely and immediate topics, as its focus turns to Australia’s $2.6trillion superannuation sector.
In any case, we all must agree that it is our responsibility as an industry to provide services that deliver what the customer expects of us. For managed funds this means at the most basic level investment performance, as well as offering customers flexibility to access and manage their investments in the way they wish to, which may not necessarily be the way we do today.
Another consideration, closely aligned to fund performance, is cost. Reduction of cost is the purest form of alpha and focus, therefore, deservedly should be placed on the points of highest friction in the current investment value chain. The cost of processing should not be prohibitive for consumers to invest.
Over the last six years Calastone has played a key role in enabling the Australian funds sector to make great strides in the automation of fund orders. There has been a consolidated impetus from the majority of industry to achieve these efficiencies, with many seeing faster, safer, more transparent and cost-effective ways of managing orders as a business imperative. Earlier this year global research and analysts, Forrester, conducted a study to understand the total economic impact of automated orders through Calastone. This study identified the net cost savings realised to total over $38 million since entering the Australian market in 2012.
This is positive progress, but further opportunity remains to reduce cost for the benefit of all through moves to digital processing and centralised, agnostic networks. For instance, investment transfers, what should be a simple exercise to transfer investment assets from one portfolio to another often takes several weeks to undertake. Clearly this is a poor and damaging investor experience, is this really appropriate in 2018?
Every part of the wealth supply chain needs to realign with what is going to produce the best outcome as the industry grows bigger. From that point, it should become very clear how skills, systems and strategies can be put to work for better outcomes, and the answers are invariably going to involve scalable technology.
The more focus and attention given to the end customer and investor is the right thing to do, even if this means that 2018 will be an uncomfortable year for many of us. At the end of the day, we all want a system that is fair, adds value and meets the needs of each of us as consumers and investors.
(It is first published in Investor Daily on August 7, 2018 – https://www.investordaily.com.au/analysis/43425-this-royal-commission-is-at-odds-with-the-times)