ASX's managed fund service is threat to platforms but assists SMSFs
The ASX is almost ready to launch its managed fund service ‘mFunds’ which will enable investors to invest in and redeem managed funds directly. It may take a while to play out but there are many potential winners and losers.
It’s been a long time coming, but the ability to buy and sell units in managed funds on the ASX is finally upon us. The service was expected some years ago, but according to the ASX, the funds of 65 Foundation Members (fund managers) and their 45 Responsible Entities will hit the exchange within the next few weeks. The ASX has the potential to significantly improve the managed fund investment experience at a lower cost compared with the time-consuming application process required by platforms. This fast and efficient execution creates a new channel for fund managers, especially into the honey pot of SMSFs.
The ASX calls this new distribution channel the ‘mFund Settlement Service’, and it replaces what was known as ‘Aqua II’. Get used to hearing about ‘mFunds’.
The view from the ASX
In an exclusive interview with Ian Irvine, Head of Customer & Business Development, and Marcus Christoe, Senior Manager, Funds & Investment Products at the ASX, they made these comments:
Ian Irvine: “Let’s start with what it isn’t. This is not listing managed funds, the funds remain unlisted. They are not traded between one investor and another with a price set in the market place. The mFund Settlement Service follows the same process used by managers to create and redeem units in managed funds as today. The transaction is from the investor, maybe via an adviser, through an ASX broker via the exchange up to the unit registry of the fund. The orders are placed as a dollar amount and the manager prices the units and they are delivered to the investor in their Chess HIN (Holder Identification Number).
The investor then has a central repository based on the HIN with shares, ETFs, A-REITs, government bonds and now managed funds. They are all administered in the same way. In addition, ASIC recently granted relief and no paper-based applications are required. It’s all ‘electronic’. Investors don’t need to complete that 16 page application form since they’ve already been identified by their broker. But they still need to be given a copy of the PDS, even though it’s online, and we’re focussed on educating investors about managed funds.”
Marcus Christoe: “Investors need to acknowledge they’ve received a fact sheet and a PDS, with a ‘tick the box’ to confirm. The process cannot continue until this has happened. After the order is placed, the investor is advised that the fund manager will be setting the unit price when they strike the next price. Then it follows a similar process as shares, with a contract note from a broker and a Chess holding statement. It’s automation and electronic communications, not bits of paper, grainy identification photos and an application form with AML (anti-money laundering) and KYC (know your client) checks each time. This identification has already happened when they first set up an account with their broker. That’s what we’re bringing to managed funds, major efficiencies and savings.”
Ian Irvine: “It also fills out the offering for our brokers. They have been immensely successful in selling listed securities to SMSFs, but these direct investors have denied themselves the opportunity to invest in managed funds and access a broader range of asset classes, beyond a domestic equity focus concentrated in banks and large mining companies. It also benefits the fund managers who gain access to this group of investors, and the administration providers who can pull everything in from one system.”
Marcus Christoe: “We will have a separate website for mFunds, a new service with aggregated information on all the managers, including lists of MERs, after-tax returns, distributions, copy of the PDS, details on the fund managers. It puts all the information on 65 managers in one place.”
Ian Irvine: And in the same way we make market announcement for companies, there’ll also be announcements for mFunds. Trustees will be well-informed in one spot. We will have a heavy focus on education, ensuring investors understand managed funds.
The timing is extremely close. We have the most significant regulatory approval. We plan a media announcement within weeks, which will include the 65 Foundation Members and 45 Responsible Entities, or we may announce it in tranches of names.”
(End of interview).
Some commentators have called this development a ‘game changer’, but perhaps it will be more like the ETF experience, which took time to establish itself but has now gained momentum and sustainability, recently passing $10 billion.
The investor experience
Investing in a managed fund on the ASX platform will be similar to buying a stock or ETF. While this is easy for anyone with an existing broker and HIN, a minor drawback is that execution is likely to be on a different page than normal shares, due to the technology links and the need to acknowledge the PDS. This presents a marketing challenge for the ASX and brokers to make clients aware of mFunds.
Compare this familiar and quick experience with investing in a managed fund on a platform. Find a PDS, print and fill in the 15 page application form in writing, including customer identification. If investing for a SMSF, provide a copy of the trust deed certified by a qualified witness and verification of trustee identification, write the cheque and mail to the fund manager who may receive it a few days later and need to contact the investor if anything is missing. Eventually, the money is invested, and in the meantime, who knows what happened to the unit price. However, once set up, it’s not difficult to switch, add or withdraw, and the reporting service, especially on tax, is good.
The Holy Grail for all fund managers is accessing the $500 billion in SMSFs from a million trustees, and mFunds opens this door. It would be rare for an SMSF not to have an existing broker relationship and HIN.
Pricing of mFunds versus managed funds
Most boutique fund managers work hard to be added to the major retail platforms such as those offered by Colonial First State, BT and Macquarie. Inclusion opens their funds to the thousands of advisers who use these platforms, and the Business Development Managers (BDMs) at the boutique funds can then target the advisers who use the platforms.
But it comes at a cost. While the platform charges a single Management Expense Ratio (MER), a typical wholesale platform fee of 1% might be split 0.5% for the platform and 0.5% for the fund manager. In the wrap world, there is a wrap administrative fee added to wholesale fee on the fund.
In the mFund world, the boutique manager can offer its own funds with its own PDS direct to the retail investor without a platform or wrap fee, reducing the cost relative to a platform. For example, a popular manager like Magellan has its own fund and PDS, but the cumbersome application process is a barrier to the SMSF market. Magellan sees the potential for mFunds to remove this barrier, and with SMSFs underweight global equities, the ASX service is a strong opportunity. The timing of a fund manager like Magellan joining mFunds also depends on finalising the technical links to the exchange. The mFund will have the same cost and features as the fund available directly from Magellan (in fact, it’s the same fund) but without the inefficiencies of filling in a new application form and not having reporting under the same HIN.
It also opens the ability for BDMs to market to advisers who are known to have large direct or SMSF businesses, bypassing the retail platforms at a competitive price.
One qualification is that SMSFs are not currently major users of managed funds, comprising less than 15% of their portfolios. The major opportunity may be opening a new distribution channel where SMSFs buy managed funds via the ASX, rather than dragging money off the platforms. This is part of the education challenge.
If the fund managers associated with major platforms do join mFund, the price will be their so-called ‘mezzanine’ or ‘ A Class’ wholesale price, to ensure their own offers remain competitive.
What do the retail platforms think?
Many of the large fund managers owned by banks which also run large platform businesses will not participate as Founding Members of mFunds. There is a conflict in opening an alternative distribution channel that might push funds away from the platforms, and they see no first mover advantage. The large platforms will watch the progress of mFunds and only participate if resistance is no longer economic.
At this stage, the large retail platforms believe that the ASX and brokers will need to spend a lot of money promoting mFunds to gain market acceptance. While they acknowledge that some of the friction in their application processes will be removed, mFunds require the payment of brokerage and do not offer the same rich functionality of platforms. They argue that managed funds are sold and not bought, and need to be accompanied by an advice piece. The strong adviser links will continue to direct money towards the platforms.
But there’s an obvious tension here. Within the large bank-related wealth businesses, the fund manager side wants more distribution and involvement in mFunds, while the retail platform side wants to protect its own distribution. It creates tense internal conversations.
Broader market implications
The main appeal of mFunds is the simplicity and efficiency of execution. An investor can have a portfolio of index-based ETFs matched with actively-managed mFunds transacted in a single operating model. Many SMSFs like this direct world of electronic feeds, online research and execution, and eschew the world of paper, cheques and snail mail where possible. The ASX is well-placed both to participate in and encourage the move to direct. Note, however, that not all brokers have agreed to join mFunds at this stage.
The recent introduction of super wraps by a large number of industry funds to counter the SMSF threat and give their clients access to ASX securities has been at the expense of managed funds, and there is potential to address this.
And as more financial planners switch their business models from commissions to fee-for-service, many are changing to listed investments, but they have a familiarity with the managed fund world of platforms. They will now be able to use many of their favourite fund managers in mFund format.
The potential winners from mFunds are the ASX, brokers, fund managers, SMSF administrators, SMSFs and other direct investors and planners who have moved into the online space. The potential losers are the large platform providers, fund managers who are not allowed to participate and maybe ETFs, who now have online competition. But there’s a long way to go before the major platforms with their massive adviser support are forced to reconsider their own business models.
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