Platforms maintain cash rate on RBA cut

The ethics of some of the most widely used platforms are being questioned as they again come under fire for the interest rates applied to their cash accounts. Ally Selby writes.

Netwealth and HUB24 maintained interest rates on cash accounts at 0%, following the Reserve Bank of Australia’s unprecedented rate cut that brought the official cash rate to 0.25%.

And the move has seen them cop criticism over their refusal to at least apply the RBA rate for account holders.

Both platforms confirmed the decision to maintain rates at 0%.

“Nothing has changed [since last week] for our cash accounts – clients are receiving zero,” a HUB24 spokesperson said at the time.

“Following the RBA rate cut of 25bps, Netwealth… will absorb this reduction in respect to our client’s cash transaction accounts,” Netwealth said.

While HUB24 would not reveal if the RBA rate cut would impact its revenue, Netwealth amended its outlook for the full year to be between $116-120 million. Netwealth and HUB24 previously cut their cash rates to zero following the Reserve Bank’s rate cut to 0.50% on March 3.

But WealthO2 co-founder and managing director Shannon Bernasconi 01 told Financial Standard the likes of Netwealth and HUB24 have some explaining to do.

“Platforms did not get any scrutiny during the Royal Commission,” Bernasconi said.

“I feel that platform providers and everyone in the value chain have the obligation to clean up their act and stop charging cash fees.”

“I believe the trustees should be obligated to provide members with, at the minimum, RBA cash rate,” Bernasconi said.

“With regards to the many other areas of regulatory focus, fee for service (or lack thereof) in my mind should be reviewed across the board.” She has seen an increase in cash holdings on WealthO2 amid the current market volatility. “In recent month s, a sell down of assets has increased cash levels. On WealthO2, cash levels have increased by 50% in the past few weeks,” she said. Pre-coronavirus sparked market volatility, members may have already had significant cash holdings on their platform, Bernasconi said.

“Other members may maintain higher levels of cash to support monthly pension payments,” she said. “The other factor to consider is when a separately managed account or investment manager of a managed account decides to increase cash allocation. This substantially increases the levels of cash held by the investor.” Bernasconi called out minimum cash holdings, arguing they leave the client worse off.

“In some cases the client is forced by the platform to hold up to 1% in cash,” Bernasconi said. “In these cases the adviser is recommending a product platform that is forcing sells to maintain this minimum cash level, but now the client will not only not get interest income but will also be paying administration fees on those balances.”

Responding, a HUB24 spokesperson said: “Given we are now operating in an environment where cash rates are at historical lows, similar to transactional bank accounts with the recent decrease in the cash rate most of our clients are earning zero on their cash account.”

However, the spokesperson maintained cash accounts on the platform were not intended to be used as an investment option.

“The cash account is the transaction hub used

I believe the trustees should be obligated to provide members with, at the minimum, RBA cash rate. Shannon Bernasconi to facilitate activity on the platform, for example withdrawals, deposits, pension payments and investment trading, it includes features like automatic investment plans and regular withdrawals,” the spokesperson said.

“It is not intended to be used as a cash investment option.”

Netwealth joint managing director Matt Heine 02 reiterated that cash accounts on platforms are not an intended as an investment.

“Given the recent reduction in the RBA rate, Netwealth now pays 0% on our cash account,” he said. “Our rate is a floating rate, is clearly disclosed, and therefore reflects the current RBA rate less 50bps. “The cash held in a client’s account can be invested into a range of other cash products (term deposits, cash funds, ETFs etc) and we do not require them to hold a surplus above our minimum. “If a client chooses to hold extra ’at call cash’ it is at their direction and discretion for a variety of reasons which are in their control.”

But Bernasconi is adamant her competitors are charging unfair cash fees.

“Be open and transparent about the service you’re offering and the fee that comes with it,” she said.

“Don’t make money hidden behind the scenes to subsidise the fact that you’re actually not charging it upfront.”

In a note to investors, Macquarie equity researcher Matt Johnston argued that the RBA’s earlier 0.5% cash rate cut will leave platform members worse off.

“If HUB24 and Netwealth fully pass [this rate cut] through to consumers, on average, accounts will generate 0% gross interest,” he said.

“Net of fees, the majority of cash accounts on HUB24 and Netwealth will be negative. i.e. it will cost consumers to keep cash in these accounts.

He believes advisers are unlikely to recommend large cash holdings on these platforms at these current rates.

“Under the best interest duties we find it likely advisers will struggle to justify keeping significant cash balances in accountholders cash accounts to provide better outcomes for their clients,” Johnston said.

This is particularly the case for retirees, he argued. “Superannuation has typically higher balances… The net of fees return to clients we estimate underperforms the RBA cash rate by about 75 to 80bps for super members, causing undue erosion of superannuation assets for members,” Johnston said.

In addition, current market volatility will see more platform members increase their cash holdings, which may draw regulatory scrutiny, Johnston said.

“Both platform operators have noted that in high volatility and bear markets, accounts increase weighting to cash, which can offset declining FUA,” he said.

“However, we think this only highlights our thesis and increasing weights in cash accounts on negative carry causing undue erosion of assets we believe will attract higher regulatory scrutiny.”

Bernasconi questioned whether this was ethical. “There is no legislation, there’s nothing put on a trustee, to ensure that pensioners cash weightings get at least RBA. Many of them get zero percent, they get nothing on their cash,” she said.

“Is that even ethical, is it an issue that [the platforms] are making money on that cash but they’re not even giving them RBA rates in a super pension account?”

Evans and Partners believes cash to be a big source of revenue for the likes of HUB24 and Netwealth.

“We assume that the cash administration fee represents around 22% of platform revenue for both HUB24 and Netwealth,” the stockbroker said in a note to investors.

However, this is hard to discern as neither platform discloses cash-related revenue.

“Neither HUB24 nor Netwealth disclose the exact contribution to revenue related to the cash administration fee,” Evans and Partners said. “While Netwealth provides a more detailed breakdown of platform revenue, the exact quantum of the cash administration fee is not disclosed.

“HUB24 does not disclose the breakdown of its platform revenue, however it has previously called out that around half of the platform segment revenue is in the form of administration fees, with the balance in transactional and ancillary charges, including the spread earned on cash transaction accounts.”

Evans and Partners said any further rate cuts will have a material impact on platform’s earnings. IMAP chair Toby Potter told Financial Standard that cash account fees are justified.

“Cash accounts operated by platforms are a service that have a cost to operate; it’s not a free service to take on the risks of managing what are essentially quite complex bank accounts,” he said. “On the one hand, platforms have got a competitive pressure to pass on the best interest rates they can achieve. On the other hand, platforms, like any commercial enterprise, deserve to be compensated for the work, develop and risks they take on in providing that part of their service. “I don’t see any evidence of cartel-type behaviour, it’s a highly competitive market, in which there are both bank and non-bank participants.” He argued it is up to the adviser to assess whether large weightings towards cash, and the subsequent fees involved, are right for their clients. “Part of the role of advisers is to understand the impact on particular clients of the combined package of services offered by a platform or some other administration service,” Potter said.

“So for a client who is going to the minimum cash in a cash account, then at these current low rates, the half a percent may be utterly inconsequential to the client. To a client who has a lot of cash this may be a significant issue.

“Part of the adviser’s job is to understand the personal circumstances of the client.”

Citi equity analyst Siraj Ahmed, who specialises in wealth platforms, says clients are aware of cash fees. “Cash margins are an indirect fee; platforms do make margins on cash but I do think this is pretty well disclosed to the client, it’s in the PDS as an indirect cost so it’s not a fee for no service,” he said. “Fees on cash make up 26% of Netwealth’s revenue, while admin fees made up 50%. The rest is transaction fees and ancillary fees.

“The 26% is the interest that they retain on the cash balance. Clients get a particular cash rate, Netwealth and HUB24 get a different one and that’s the cash admin fee.”

Whether or not this is fair, Ahmed refused to comment.

“There’s various platform pricing models out there – which one works and which one doesn’t, at the end of the day, price is an important component in choosing a platform provider, but it’s not the only reason to choose a platform provider; functionality is important, customer service is important, all of it comes into play,” he said.

Bernasconi believes a regulatory crackdown on the platform’s hidden costs would help make fees more transparent.

“If regulators started actually looking at some of these hidden costs and so forth and actually started saying ‘no that’s inappropriate, you can’t do that, or you have to disclose it as a fee outright in the same way you disclose your obvious fees,’ that would help,” she argued.

“I also think it would help the advisors not have to find it; finding it in the PDS all these hidden fees is so difficult.”

ASIC did not reveal whether it is looking into transparency and fees on platforms, however, a spokesperson said that “platform operators need to act in the best interest of their clients and clearly

Planners are demanding more support from platforms, and their support needs to go beyond custody and reporting. Recep Peker disclose both the returns and fees for their cash options.”

Meanwhile, a financial adviser, who preferred to remain anonymous, said she would be very surprised if advisers recommended their clients have significant cash holdings in accounts on these platforms. “Some clients prefer to have large cash holdings, and I would usually recommend they put this cash in high interest bank accounts or term deposits,” she said.

“I use platforms to actively invest my client’s money – I don’t think advisers would recommend clients put their money in cash accounts on platforms.

“Usually there is only enough cash in these accounts to cover fees.”

NMG Consulting partner Mark Watmore, who surveyed nearly 400 advisers last year as part of his firm’s Australian Adviser Insights Programme, told Financial Standard advisers would appreciate more competitive cash options on platforms.

“When we talk to advisers, they say they would actually love to have more competitive rates and a more diverse range of cash options offered on their platforms, but because none of the major providers are offering that they have had to accept the status quo,” he said.

He argued that cash fees are not topping the priority list for advisers.

“I think there was a lot of noise about it during and after the Royal Commission, because there were some cash accounts that went into negative because of fees,” Watmore explained.

“But I think in adviser land (whilst they see it as important) they’re not seeing it as the important factor in selecting a platform.”

Despite this, Investment Trends said that fees remain an important selection point.

“Post-Royal Commission, the most cited platform selection driver is now fees, with low overall cost to clients (57%) overtaking efficient admin (45%),” Investment Trends research director, Recep Peker 03 said. He argued that advisers now expect more from their platforms.

“While many platforms continue to maintain high user satisfaction, industry wide overall satisfaction has declined to a seven-year low,” Peker said.

“Planners are demanding more support from platforms, and their support needs to go beyond custody and reporting.

“In fact, over half of planners (54%) are willing to pay their main platform more to access better support in their practice and personal development, highlighting the opportunity for platforms to expand their value proposition.”

Although many platforms make a significant percentage of their revenue from interest on pooled cash accounts and cash related fees, Watmore said the current low interest rate environment will limit that potential.

“Within a platform there are many levers for making fees, and cash seems to be one of them, but the opportunity for that is clearly reducing as rates get so low,” Watmore said. fs