Investment Platforms – Technology’s new Pandora’s Box?

Since the turn of the century, improvements in technology have redefined the way people work, rest and play.  As a result, investors now expect a seamless and integrated experience when interacting with financial markets.

Fortunately, providers have adapted to these expectations giving rise to increased accessibility of information, readily available financial advice and improved functionality across the financial landscape.  Today, investors can analyse their financial situation, investigate potential responses and transact all while commuting to work on the train. In aggregate, these trends have underpinned continued growth in the value of Australian personal investments savings which totalled $2,575¹ billion dollars as of 30 June 2017 and is expected to nearly double in the next 15 years².  However, this fast pace of technological advancement has opened the door for disruptive innovation.

This innovation has largely focused on tech-heavy start-ups disrupting the market through low-cost platforms which make investing simple and easy.  According to Rice Warner’s recently released Personal Investments Market Projections 2017 report, this strategy has paid substantial dividends with Wrap-style products nearly doubling their funds under management over the last 5 years.

Given this increased accessibility, retail investors now have access to a myriad of financial products that historically have been impractical to access due to their complexities or need for scale.  Examples of this are wide ranging and include:

• ETFs which provide a low-cost passive investment to enable greater diversification of portfolios and;
• Smart beta funds that use quantitative rules to provide active-management style returns at a low cost.

Figure 1 depicts the total funds invested in Wrap platforms over the past 5 years and shows that there has been a 42% growth in funds invested in these products since 2013.  However, with increased simplicity and accessibility comes increased responsibility and due diligence. To reap the benefits, investors using platforms must make informed investment decisions and understand the risk and return profile of the investment they can now access, ensuring that it is fit for purpose

Figure 1. Investment in Platforms, managed funds and life products 2013-2017 ($ millions)

Table 1, an extract from Rice Warner’s Personal Investments Market Projections 2017 report, reflects that most of the investment in Wrap platforms flows from the wealthiest quartile of the population. Compared to the rest of the population, wealthy individuals are more readily able to obtain and afford (usually reputable) financial advice and therefore be more likely to make informed investment decisions.

Table 1. Proportion of Total Investment into Platforms, Managed Funds and Life Products

The findings of the Royal Commission will lead to a new model for financial advice.  This will be driven by technology and compliance, with different models for delivery – at a lower cost and with goals-based strategies.  There will be an increased development in the development of self-directed advice tools which will assist members/investors to make appropriate and informed investment decisions.  In aggregate this is likely to improve investment outcomes throughout the economy and underpin continued growth of personal savings into the future.

¹ Including approximately $1.1 billion of Investment Property assets net of mortgages.
² Rice Warner’s Personal Investments Market Projections 2017 report.