Australia, Funds Management, Personal Finance - Written by on Thursday, September 1, 2011 8:43 - 0 Comments

Smart Investor blue ribbon awards: investment

Smart Investor, September 2011

Australians are having a hard time with investment at the moment: it’s been a directionless, rudderless market without much consensus on what’s likely to happen next. Where will European sovereign debt problems, US growth worries and Chinese inflation leave world or local markets? There’s uncertainty in every asset class, be it local or global equities, bonds, property, currencies or commodities.

For many of the businesses that serve Australian investors, there’s a mixed picture that comes from this. Some institutions are thriving: notably CFD providers and FX platforms. For others, particularly those based around straightforward equities, business tends to be a little quieter.

At BT Wrap, for example, which was chosen by judges Rice Warner Actuaries as the nation’s leading investment platform, market share is increasing but the overall pie is not getting bigger at its usual rate. “It’s a very soft trading environment,” says John Shuttleworth, general manager for platforms, marketing and communication at BT. “If you look at the total market, annual flows over the last 12 months were about $10 billion. To put that into context, if you look at a normalised year taking out the peaks and troughs you’ve normally got about $30 billion. The market is running at one third of the usual new money flowing in.”

This doesn’t apply to superannuation money so much, since the state requires that 9% of earnings go into super regardless of the market. “Our business has been fairly consistent,” says Justin Delaney, head of platforms at Macquarie, whose Macquarie Wrap Super and Pension Manager was named the best superannuation platform in the industry. “We are certainly seeing an increasing level of flows towards super versus vanilla investment options. Super is still growing well, and at a better rate than the pure investment market.” It’s in the discretionary area where people still don’t seem to be comfortable in putting their money to work. “Post-GFC, a lot of people are still sitting in cash,” says Shuttleworth. “We have on our platform cash solutions as well as managed funds, so we can see a high level of people staying in defensive asset classes, driven by the volatility in the markets.”

Which platforms thrive in this environment? Rice Warner liked BT for its comprehensiveness, in terms of its investment menu, features, terms and conditions, alongside competitive fees. And it felt Macquarie had the most extensive list of investment options, again accompanied by strong features and terms such as flexible client servicing facilities, excellent capital gains tax management functionality, and tailored facilities for superannuation needs (enabling clients to split insurance between super and non-super, for example).

Managers themselves see other important elements in the mix. “What’s driven our success is that we’ve got a very strong distribution base, with some high quality dealer groups who have been supporting us for a number of years,” says Shuttleworth. In that respect, being owned by Westpac, and therefore with close links to St George and Asgard, is clearly helpful. “You need good, strong distribution, and to secure that you’ve got to continually invest in the platform to make sure it has the best features and functionality in the market.” Nick Bowley, national product manager for BT Wrap, agrees: “There’s lots of competition out there, but those who invest and deliver are the ones that are successful.” Specifically, BT Wrap has bolstered its equities capability, and has seen the asset class climb from 10% of its funds under administration to 16% by making the process for managing equities – which is a lot harder than managing managed funds – more efficient. Other initiatives have included building model portfolios for advisers, enabling them to combine equities and managed funds; and bulk trading functionality, when advisers need to buy and sell in large volume to rebalance client portfolios quickly.

Delaney attributes Macquarie’s success to “a good combination of rich functionality, good service and competitive administration fees.” Distribution has been important for Macquarie too, but in a different way. “We are really here to support the boutique market in particular,” he says – that is, boutique advisers and independent financial planners who will advise you on your superannuation and then seek a platform to help them implement what they want to do.

Both BT and Macquarie are known for the range of their investment menus; BT has almost 700 managed funds as well as all ASX listed securities; Macquarie, which also offers ASX securities, has 580 funds on its menus. But is there a point when you can have too many options? “It’s that breadth you need to have in order to cater for advisers and dealer groups using the product,” Bowley says. “There are various levels of sophistication, such as the high net worth space, so you need a breadth of investment products.” Shuttleworth adds that dealer groups, who have their own research teams, will create approved products lists from those investment menus that might be much smaller. Delaney at Macquarie adds: “We don’t see our role in managing the menu as being making a selection. We make sure funds meet our requirements, but whether it’s 600 or 200 comes down to adviser demand and what they believe they need for their clients.”

Both groups have also sought to make sure that the growth of self-managed super funds is a source of opportunity rather than just a threat. Delaney says Macquarie gets a lot of SMSF business into its investment wrap, in which a client will have the independence of a self-managed fund, but will still use a wrap platform as the vehicle for running the fund. BT Wrap has also tried to tailor some of its services to this group.

[SUBHEAD: The crowded broking field]

For those who seek to invest directly in equities through a broker, there is a greater range of choice than ever before. We award three prizes within this field: the fully-featured online broker, the low-cost online broker, and the traditional non-advisory phone broker.

CMC Markets, our winner in the low-cost category, gave the market a shakeup last August when it dropped its headline brokerage rate to $9.90 per trade, by some distance the lowest in the market. It had an instant impact: E*Trade swiftly dropped its own rates, for example. The policy had a very quick impact for CMC, which only had a 3% market share a year ago and is growing swiftly. Moreover, CMC has attracted very active traders, who have accounted for most of the new business – meaning that turnover at CMC is up 40% in a year.

“We’re tuned into what active traders want,” says Louis Cooper, head of CMC Markets. “They are very price sensitive, and the more they trade, brokerage becomes a far bigger aspect of their trading, in terms of what it takes away from their profits.”

While CMC markets itself hard on its low cost – “we’re here to say investors have had a raw deal for many years, and we have proven you can run a very profitable business at a low price point,” Cooper says – they are also keen to point out that low-cost doesn’t mean low-service. “Just having a low price point is not enough for active traders,” he says. “We have not in any way shape or form reduced our price point at the expense of the functionality for our customers.” For example, CMC offers free unlimited conditional orders, free dynamic charting, and very fast order processing. It also offers education packages in order to attract new traders as well as the active ones.

Westpac won our fully-featured online broking category; like its BT Wrap sister, it has seen trading volumes soften yet has increased market share. One of the reasons it has been able to do so is by building out the capability of the platform, which allows customers to trade equities, options, CFDs and other securities both domestically and internationally off a single platform, aided by a host of news and research services, and practical assets such as a linked cash account.

Do people need all the bells and whistles? “International is a good example,” says James Staltari at Westpac Online Broking. “It is only used by a segment of our customer base, and not by the masses. But it’s important to have that full suite. The self-directed market is continuing to grow at a rapid pace, and our research shows that while not everyone uses all the services, it’s important for them to have everything available on a single platform so they don’t have to open another account with a different organisation.”

The Westpac model involves standard and advanced research packages, with the advanced one offered free of charge to anyone who trades two or more times a month. News feeds cover a host of sources from Reuters and Dow Jones to more specialist providers like Morningstar and Lexus Nexus, or homegrown Westpac Economic Research and fund manager Advance. Frequent videos, updated through the day, offering insights on financial markets, are proving increasingly popular. At the same time, efforts are made to make life easier: Westpac’s mobile phone application is growing exponentially, Staltari says, allowing people to buy and sell, access research and manage their portfolio on their handhelds. “We are seeing month on month double digit growth.”

And there’s still a role for phone broking, a category in which First Prudential took the prize. “First Prudential provides significantly lower cost trading over the phone when compared to its competitors across several trade scenarios,” says Infochoice, our judges in this category.

Almost everyone interviewed in these features talked about the potential for regulatory change, particularly around the provision of advice, and few areas have faced greater regulatory and tax uncertainty than margin lending in recent years. “It has been an interesting year for lenders of margin loan products,” says Sean Doolan, head of Suncorp Margin Lending, which won our margin lender category. For a start, several business processes have had to change since January 1 following the newly introduced Margin Lending Regulations. “This has seen a substantial change in the application and assessment process compared to days gone past,” he says. Then there’s the way Australians view debt in the wake of the financial crisis. “The margin lending industry as a whole has had its challenges, largely tied to Australians being more conservative with their debt and risk levels due to economic uncertainty,” he says. And on top of that, there’s the state of the markets. “Our local market has failed to provide motivation to increase loan-to value ratios back towards pre-GFC levels. Customers are maintaining their current positions but ongoing economic uncertainty and the GFC hangover is still impacting their risk tolerance levels.”

Despite that, Suncorp reports an increasing number of new customers attracted by low interest rates in order to take advantage of buying opportunities. It’s just a question of people becoming convinced that it’s safe to go back into the water. “The market is arguably undervalued in some areas, but while uncertainty about the economic conditions across Europe, the US and our own multi-speed economy continue, we expect this cautious approach to play out a bit longer before confidence returns more broadly to drive industry growth.”

Across the board, the trend everyone remarks upon is the shift towards self-direction: people taking control, doing their own thing, taking responsibility for their own investments. In a recent Suncorp survey, more than 70% of Australian shareholders said they were making their own trading decisions rather than relying on the advice of a stockbroker. “The control and confidence that customers feel they have from managing their investments will also influence the performance of the market,” Doolan says. And this is going to define the way the industry develops from here: serving people like you who want to take charge.

Breakout: CFDs and Forex

Whilst most investors struggle with market volatility, for some people it’s good news. CFD providers, for example, thrive in these conditions.

“Market volatility is a big driver for us,” says Tamas Szabo, CEO for Australia at IG Markets. IG in Australia has enjoyed growth in all its key metrics: new client takeup and client activity.

“When we see volatile markets, people generally trade shares a lot less and tend to trade indices, commodities and FX a lot more heavily,” says Szabo. “Our commodity business has overtaken our overall share volumes recently, and that’s never happened before.” Where shares used to be dominant for IG Markets, today they are less than 20% of the business. And since indices, commodities and FX are mainly not that easy to track for individual investors, much of this business has flown to CFD providers.

It has helped that commodities have either been soaring through market turmoil (gold), or have behaved with intense volatility that has allowed smart traders to take advantage (silver). “CFDs give clients opportunities to take advantage of market movements – and the trend is towards markets moving rapidly, rather than not doing an awful lot,” Szabo says.

Most clients still use CFDs for short term speculation, but it appears more and more are using them for hedging and risk management purposes generally; it’s hard for providers to know exactly how their clients are using the product. So what differentiates a good CFD provider? “Reputation and financial strength,” says Szabo. “With some high profile cases of financial providers getting into difficulty, this is focused on a lot more heavily. People need to understand the risks of the product and the provider – what happens to their money when they place it on deposit?” IG Markets, which is listed (in the UK) and therefore transparent as well as large, has benefited from this scrutiny, and it never uses client funds for its own hedging activity. On top of that, it has a very wide range of available investments.

Foreign exchange providers, too, appear to be thriving because of volatile markets. “Volatility can have a significant effect on driving trading volumes, which continue to run at elevated levels,” says David Morrison, derivatives market strategist at GFT. “While volatility in equity markets has been subdued recently, it has spiked higher in commodity and currency markets.” The uncertainty around sovereign debt, and the outlook for global growth, have “kept investors and speculators on their toes,” he says. And in his view, it’s going to stay that way, with sovereigns having assumed the bad debts that nearly destroyed the banking system, and policymakers facing a great challenge in steering the right path. “Consequently, we expect the financial markets to remain volatile, and this should continue to drive up trading volumes.”

GFT’s approach is to provide software, education and services allowing customers to trade quickly, efficiently and securely, through its DealBook software. All told, across offices worldwide, it has a client base covering 120 countries; as with IG Markets, the scale and global reach appear to reassure investors. “Increased regulation across the globe is aimed at weeding out bucket shops and creating more legitimacy for the end user,” says Kathy Lien, director of global research and analysis.

Lien expects forex to remain in the minds of Australian customers. “Interest in forex trading remains strong and the volatility in currency values will keep FX rates in focus,” she says.


Fully Featured Online Broker

Westpac Securities

Features and fees:

Online brokerage of $19.95. Frequent trader discounts, dynamic market information, international share trading, cash management account. Market depth: 100.

What the judges say:

Westpac Securities’ brokerage package possesses plenty of bells and whistles for investors and outscored the competition across both features and pricing.

Cheapest Online Broker

CMC Markets

Features and fees: $9.95 for online brokerage. Also allows free stop losses.

What the judges say:

For the average investor the cheapest way to buy or sell shares online is through CMC Markets which offered the lowest rates for a variety of trade scenarios.

Cheapest Non-Advisory Phone Broker

First Prudential Markets

Features and fees: Average price for a $5,000 or $10,000 trade: $14.95.

What the judges say:

First Prudential provides significantly lower cost trading over the phone when compared to its competitors across several trade scenarios.

Margin Loan


Features and fees: Variable rates 8.99%-9.24%; short term fixed rate 8.6%-8.85%; long term fixed rate 7.7%-9.6%. Features include 5% share buffer, interest paid on credit funds, and portfolio management.

What the judges say:

Suncorp’s rates and pricing across a range of tiers consistently outperformed its rivals throughout the year, offering investors a cost effective margin lending solution.


IG Markets

Features and fees: 147 Australian shares with margin rates less than 10%; $8 minimum ticket charge; share financing of 2.5%; live ASX data, at a cost of $37.50; guaranteed stop loss, international shares, gold, oil, treasuries, economic research, and company profiles.

What the judges say:

IG Markets offers CFD investors extensive platform features, trading and risk management tools at one of the lowest costs in the market.



Features and fees: Spreads from 0.8 in most major cross rates. 129 pairs offered. Dealer desk.

What the judges say:

GFT outscored its rivals by providing one of the lowest spreads on key currency pairs, a full set of features, and flexible trading options.

Platform of the year – Investment

BT Wrap

Funds under management

$18.33 billion (at 30 April 2011)

Number of investors

51,000 (at 30 April 2011)

Number of advisers

4,500 (at 30 April 2011)

Minimum investment


Maximum administration fees

0.79% p.a.

Average management fee*

0.71% p.a.

Menu options

More than 580 managed investments and all ASX shares

Number of switches

Unlimited; $61 fee per switch

Report frequency


Commencement date


* taken from the average fees of Fully Active Balanced Funds

What the judges say:

BT Wrap is a comprehensive all round product.  This includes providing a combination of an extensive investment option menu and a comprehensive range of features, terms and conditions.  These are supported by a competitive fee structure.

Being the top player in the platform market, BT Wrap continues to develop market leading features and functionalities.  In particular:

  • BT Wrap’s Model Portfolio tools aim to reduce administrative burden and to assist advisers implement tailored advice for clients;
  • BT Wrap’s new Minimum Gain methodology enables clients to improve capital gains tax optimisation; and
  • BT Wrap’s Customer Centric Design methodology delivers excellent end-to-end services.

Platform of the Year – Super

Macquarie Wrap Super and Pension Manager

Funds under management

$22.70 (at 30 April 2011)

Number of investors

78,500 (at 30 April 2011)

Number of advisers

3,300 (at 30 April 2011)

Minimum investment

$50,000 or $20,000 with regular contributions

Maximum administration fees

0.77% p.a.

Average management fee*

0.91% p.a.

Menu options

Over 650 managed funds and all ASX shares

Number of switches

Unlimited; $20.50 fee per switch

Report frequency

Half yearly

Commencement date


* taken from the average fees of Fully Active Balanced Funds

What the judges say

This product offered the most comprehensive list of investment options amongst the submissions received. This extensive range of options is complemented by its wide range of features, terms and conditions. These include flexible client servicing facilities, excellent capital gains tax management functionality and useful facilities tailored to suit clients’ superannuation needs such as enabling clients to split insurance between super and non-super.

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