(pictured: Graham Hand)
Graham Hand, the publisher of the influential Cuffelinks investment newsletter, made a compelling case at the annual Paul Woolley Centre conference in Sydney last week that, contrary to what many people have predicted, the funds management industry is unlikely to see an “Uber-style” disrupter to the business.
The conference, at the University of Technology Sydney, was told that there was no shortage of capital for fintech businesses to invest, although there might have been just a year ago. There were about 800 start-ups in Silicon Valley which were focused on financial services, Hand said. Because of the size of the Australian superannuation market it was likely to be a target.
But if one of those companies was to disrupt the market in the way Uber has disrupted the taxi industry it would have to be at the expense of one of the three major market segments – SMSFs, retail funds and industry or not-for-profit funds. The mathematics, however, did not support the likelihood of this happening.
“It doesn’t look like it will be SMSFs, does it?” Hand said. “Every day there are about 100 SMSFs opened up… When you look at industry funds, the average management fee is 63bps… There are also many multi-manager, multi-sector publically available funds for about 65bps. And you can get a liquid version, Argo [an established LIC] which has a ‘buy’ recommendation from Lonsec, for 15bps.”
Hand said big super funds were looking to drive their MERs even lower, so there was not a lot of room to move for a new entrant.
Uber, for instance, has about 15 per cent of the former taxi market in Australia. For that to happen in super it would imply about $300 billion under management for a disruptor. But Uber, as a company, still lost a lot of money. Its cash burn was about $2 billion a year, requiring new capital injections. Uber, and similar disrupters, are still building their networks so that they can take advantage of scale.
The other issue for fintech companies, Hand said, was that most Australians were still not engaged with their super. Only about one person in 10 contributed more to super than required. Of the self employed, one in four didn’t put anything into super.
“So someone will have to come into the industry and get people excited about something that they don’t really care about…. If you target people under 40, the millennials, they don’t have much money in super. And if you look outside of super, there is not much investing in equities.
For funds management to be disrupted the new offering would be online, tech-based, digital and involving robo-advice. This would require three things: a low-cost portfolio solution; tools to help advisors to be more efficient; and, goals-based advice solutions for super funds. Hand said that the second and third of these were already being provided by existing players, and were growing rapidly.
To deliver the first – a low-cost solution – would require an algorithm for individual portfolio needs, a platform to handle administration and tax and an investment management facility – normally ETFs. The platform would cost 30-40bps and the ETFs about 25bps. “You’d have to deliver all three for less than 50bps to be competitive,” Hand said. “And that’s before you’ve built the algorithm… I struggle to see which part of the cost structure you can eliminate.”
Of the big international robo-advice firms, such as Betterment, Hand said they delivered their service for 25bps by they did so by “losing a bucket load of money”. Another one, WealthFront, had about $4 billion under management. “Vanguard takes that in a weekend,” Hand joked.
And then there was the cost of acquiring a consumer. Ron Hodge, the founder and chief executive of the InvestSmart digital platform, had estimated that it costs about $300 to acquire a typical customer.
“Robo-advice companies are all about capital raising,” Hand said. “They want to keep their businesses going long enough for them to sell it.”
He believes that the vast majority of assets that are managed by robo-advisors or automated advice services will be held by companies which already have a relationship with the investor.
“The Australian wealth management industry will not face an Uber moment,” he said.