Australia | Jul 03 2019
Yesterday’s RBA rate cut has prompted more brokers to reassess their recommendations on listed independent funds management platforms.
-RBA rate cut threatens negative cash returns
-Brokers disagree on extent
-Industry funds the big post-RC winners
By Greg Peel
Yesterday FNArena published Investment Platforms Suffering Exodus, which highlighted the largest outflow of funds in decades from investment platforms and a large number of financial advisors leaving the market.
The Big Four banks, Macquarie Group ((MQG)), AMP ((AMP)) and IOOF Holdings ((IFL)) all suffered an extensive exodus of both funds and advisors in the wake of Royal Commission findings and subsequent regulatory tightening. Some of this money flowed into listed independent platform managers such as Hub24 ((HUB)) and Netwealth ((NWL)).
But while the independents have gained market share against the majors, they too have their own post-RC issues to deal with. On one side of the ledger, the majors have attempted to ease fund outflows by reducing fees, forcing the independents to respond to maintain market share growth. And greater regulatory requirements imply additional costs, hence margins are being squeezed from both sides.
Yesterday the RBA threw another spanner in the works for the independents. It was hardly a shock rate cut, but yesterday’s article highlighted the risk of lower rates potentially swinging returns on cash balances held on platforms into the negative. And as such brokers have today published reports assessing the situation, particularly in light of the expectation of at least one more rate cut to come by year-end.
To make it more difficult for investors in independent platforms, analysts are in disagreement.
An example is required to explain this risk. Bell Potter has conveniently provided one.
Netwealth recently won a contract to administer funds for fund manager ANZ Private ((ANZ)). ANZ pays Netwealth a “healthy” margin above the RBA cash rate and Netwealth passes on a discount to underlying clients. When the cash rate is cut, the amount paid to the client is also cut, so there is no impact on Netwealth’s margin.
But wait, says Macquarie. Our analysis highlights cash returns on cash allocations if fully passed through will be a gross 50 basis points, but subtract the platform’s administration fee and Netwealth’s cash return becomes -9 basis points and Hub24’s -6. Given the platforms are unlikely to expect clients to effectively “pay” to have a cash allocation in their portfolios, amidst a competitive environment the independents will be forced to lower their own margins.