Super funds rethink direct options

20-Nov-2014

By Wouter Klijn

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A number of industry super funds seem to have had a change of heart on the implementation of a direct investment option (DIO), as the take-up of existing options has remained somewhat subdued.

Bravura Solutions director for product management and strategy Darren Stevens told theinstoreport he had spoken to several funds that had abandoned the implementation of the direct option.

“Member direct investing (MDI) is an approach that some funds put in place to stem the tide of high net worth individuals moving to self-managed super funds (SMSF),” Stevens said.

“Personally, I don’t think it has worked; it has had a low take-up and a high cost.

“In fact, some of the funds I’ve been talking to have stopped the projects and are not putting the MDI in because they don’t believe it is going to have the effect they need.”

He argued those members who were considering setting up an SMSF were still likely to do so, even if their super fund offered a DIO.

“You are probably still going to lose those members that want to move to an SMSF because they are not moving because they didn’t have access to equities and term deposits,” he said.

“They move because they think they can do better than the institution they are with, or they don’t trust the institution they are with, or they can get better tax effects through a SMSF.”

A number of funds had, therefore, adopted different strategies to retain those members, he said.

“Some of them are putting adviser solutions in place, targeting those people that are most likely to move to SMSFs and try and retain part of the value chain, either through an investment, or through other products, or be it through financial advice and retain the clients in that way,” he said.

Stevens made the comments on the back of Bravura Solutions’ rollout of Sonata, its administration solution that allows super funds or any other wealth management company to replace their legacy platforms with a centralised system that allows any type of product to be bolted onto it, including DIOs.

Despite his reservations about the success of the DIO, Stevens said it would still help Bravura’s rollout of Sonata.

“It is still a driving force for us, as funds need a much more holistic solution that goes from simple products through to more complex wrap-style products,” he said.

His assessment of DIOs was backed by Financial Services Council chief executive John Brogden at the launch of the association’s “State of the Industry 2014” report on Monday.

“A few of the big industry funds have spent a lot of time and effort to try and deal with people showing a desire to run their own retirement strategy, but wanting to keep them in the funds and basically offer them a self-managed experience inside an APRA (Australian Prudential Regulation Authority)-regulated fund,” Brogden said.

“The early feedback that I received is that that is incredibly expensive and taken up by very few people.

“So people are saying: ‘If I want to self-manage, I’m going to self-manage. I’m not going to do it through a different experience.’

“What people hoped would be a strategy to keep people in the tent isn’t working with any significance to this point.”

Expectations of take-up

Yet, AustralianSuper, which was the first industry fund to put a DIO in place in 2011, has always argued the product has retained members.

The fund’s 2013/14 annual report showed it had $650 million of Member Direct funds in Australian equities, but that figure did not include Member Direct funds that were invested in term deposits.

But, AustralianSuper has argued that number under-represents the total assets retained, as members who use the DIO do not, and in fact are not allowed to, place their entire account balance in the option.

AustralianSuper had 3317 members sign up for its Member Direct platform in the 12 months to March 2014, of which 686 were new members of the super fund and 2631 were existing members.

UBS Australia is one of the companies to offer the platform underlying DIOs.

UBS head of investment platforms Ian Dunbar told theinstoreport that instead of funds abandoning implementation projects, he had seen a pause in the take-up.

“What we’ve seen over the last couple of years is that there were early adopters and reasonably fast followers,” Dunbar said.

“Then there are funds that have taken a more cautious approach and have wanted to wait and see what the take-up would be.

“Over the last six months, it has been a somewhat quieter period as those early decision-makers have moved through the cycle and the more conservative funds haven’t made a decision yet.

“Interestingly though, over the last month we have seen some of that second group activate these early discussions again.

“We’ve seen a pause and I think what we are starting to see is that we are coming out of that pause.”

He said the general take-up of DIOs had probably been slower than initially expected, although that was partly offset by the higher levels of funds invested.

“In general terms, we’ve seen a steady and consistent uptake,” he said.

“I use those words carefully; we almost see every week a very consistent level of uptake.

“Is it perhaps the level of uptake that the industry anticipated three to four years ago when these options were brought to the market?

“The member numbers would generally be a bit lower than we anticipated, but the average balance is a bit higher than we anticipated. It has been a slow but steady progression.”

The key to a successful implementation is for a fund to have a clear idea of which segment of their membership is likely to take up the option.

“What is important there is that the funds that have success with their DIOs are the ones that have clarity and purpose; being clear about the segment that you are going to inform and educate about the option,” Dunbar said.

“There is also definitely a scale question. It is more challenging for some of the smaller funds to justify the capital investment and the drain on limited fund resources.

“There is no hard-and-fast rule, but I would say that if a fund is in the sub-$5 billion mark, it is probably more difficult for them to justify the expense, unless they get a more pre-packaged option.

“Their ability to justify any real customisation or configuration is going to be challenged.”

Next generation of DIOs

UBS is currently expanding the functionality of the platform to make it attractive to a wider member base.

An important part of this expansion is the incorporation of adviser services, which allows members to give advisers access to their portfolios.

“We’ve seen over the last couple of years what I would describe as the first generation of these direct investment options,” Dunbar said.

“The DIO has become very focused on equities and term deposits, but what is actually relevant here is the need of a member segment.

“The self-directed investor is not just about equities and term deposits. They might just be building portfolios of investment and what they are looking for is the right content, tools and experience in doing that.

“We’ve already released the first suite of functionalities that allows that to occur and we will be continuing to expand that as well.”

This new suite of functionality revolves around the incorporation of advisory services, making it more attractive for high net wealth members and pensioners.

“The premise here is that the member can access the portfolio, but they can appoint an adviser and have that adviser as a co-pilot on that portfolio,” Dunbar said.

“The adviser can also log in and manage components of the portfolio, not just equities and term deposits, but also future contribution strategies, et cetera.”

Part of the new functionality is also to enable the DIO to integrate with dealer groups.

“It is an account relationship and enables the hierarchy to operate so a fund can appoint a dealer group and the dealer group can attach advisers and those advisers can attach to members,” Dunbar said.

“We can then support the collection of fees and the distribution of fees back to the dealer group.”

That development moved the DIO away from a mere trading vehicle to a more individualised administration and advice platform that UBS said it hoped would attract a wider group of super fund members.

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