Wealth industry failing at basic application

13 July 2018

Chris Cuffe

Chris Cuffe is Co-Founder of the financial newsletter Cuffelinks, Founder and Portfolio Manager of the charitable trust, Third Link Growth Fund and Chairman of Australian Philanthropic Services.

Chris Cuffe questions why the wealth management industry has made the application process to invest with fund managers so complicated and time-consuming.

I hate paperwork. Although I originally trained as an accountant, and I’m happy to bury myself in spreadsheets and annual reports, I have too many other priorities to be bothered filling out lengthy application forms.

Yet I want to invest with some fund managers who only offer their products through unlisted managed funds with application processes which have changed little in 20 years. These may include boutique Australian equity funds, international funds, unlisted private offers, property trusts and private equity deals, which cannot be accessed another way. Investing in some of them feels like a visit to the dark ages.

Why has the wealth management industry made the application process so complicated and time-consuming, and devoted relatively few resources to solving the regulatory requirements imposed on it? When I think of the thousands of hours and millions of dollars spent on self-interested lobbying against, say, the Future of Financial Advice (FOFA) proposals, to little avail, resources could have been much better spent addressing a major consumer need.

Industry groups, especially the main body representing the major retail funds, the Financial Services Council (FSC), have not developed solutions. Instead, a gap has been left in the market which products like ETFs and LICs have been rapidly filling through listed products.

What is the problem?

Let’s say a property group acquires a large, iconic building and launches an attractive new property fund product following months of structuring and negotiation.

They prepare marketing materials, webinars, presentations and advertisements. Investors are invited to onsite inspections. It’s all very exciting. The property group sends its business development managers far and wide meeting advisers and investors, and the launch date comes with much fanfare. The Product Disclosure Statement with the application form is sent to registered investors and other names on the mailing list, with brochures showing the steel and glass structure and its spectacular location.

Eagerly, the applicants read through the offer, and impressed by the long lease to national tenants, they reach the application form.

Sigh! Here comes the slog.

Section 1, Type of Investor, Individual must fill in sections 2 and 5. Trust or super fund, such as an SMSF, fill in sections 2, 4 and 5. Each different type of applicant fills in different sections. Is it the section for an Individual or an Individual Trustee? What if there are two trustees? Okay, let’s take a guess.

Identify both trustees, including Tax File Numbers (TFN). Then it says, ‘You must attach certified copies of documents to this application form’. Is that all documents? Choose Option A, or Option B Category 1 plus Option B Category 2 as forms of identification.

Now, identify the corporate trustee. Who are the beneficial owners? Which TFN does it mean? Then identify the SMSF itself, including a certified copy of an 80-page trust deed. What! Is that the entire document or the cover page, and is it every page that needs certifying? Does it need to be certified by a solicitor or Justice of the Peace? And do they need any deed amendments too or just the original deed? What’s the name of the regulator? Is it ASIC (for the trustee company) or the ATO (for the SMSF). And the TFN for the SMSF. That’s disclosure of four TFNs. Now, here comes the Foreign Account Tax Compliance Act (FATCA). Is this a Managed Investment Scheme? Adviser details, payment details, contact details …

Still excited? I gave up a long time ago. Life is too short. Some fund managers with an online application process admit to a 90 per cent drop out.

How did the industry allow it to come to this? The property company has spent hundreds of millions of dollars on a six-star building then laid out a one-star application process.

According to Investment Trends, 58 per cent of Australian investors do not intend to use managed funds in the near future, and when asked why, the top two reasons are cost and the complex application process.

Is anyone processing applications well?

A few companies have taken some of the hassle out of the application process, and automated as much as possible. However, in my experience, there is often a breakdown in a step along the electronic process. These more advanced systems tailor the questions for the type of entity and link customer details to a range of verification options. It is up to the fund manager to decide the level of verification required based on their interpretation of the law.

Many fund managers still require the delivery of certified copies into an office or by post, and they seem especially clunky with SMSFs, where the individual members, corporate trustee and trust have different identifications.

Wraps and platforms go some way to addressing the problem, as one application gives access to potentially hundreds of fund managers. But these only work if the product required by the investor is listed on the platform, and it is usually not worth a one-off fund or a small boutique manager going through the platform approval process.

The ASX might argue that its mFund service addresses this problem by allowing order execution (but not real-time pricing) by clients already identified by their brokers. However, some fund managers will not fulfil mFund orders on global investments until a detailed FATCA report is completed, which somewhat defeats the purpose of eliminating paperwork.

Many financial advisers facilitate investments by filling in the application forms for their clients, but it’s tedious work when resources could be better directed at offering useful advice.

What is the source of the problem?

There are technology companies marketing fund application solutions, claiming their entire process is automated and online. Some fund managers have designed their own online solutions. The limited adoption of these services goes to the heart of the problem. Just because a company has a lawyer willing to sign off on a process does not mean we have reached an industry-wide solution.

Within the offices of each fund manager, lawyers design application processes to comply with their own interpretation of laws and regulations. Many remain apprehensive that a totally online application process fulfils legal requirements relating to Know Your Customer (KYC), Anti Money Laundering (AML), FATCA and even privacy requirements. There is little comfort in a software company telling the marketing person (who wants simple applications to maximise fund flows) that their process complies with all relevant laws when there is an in-house lawyer with a different opinion. That’s just lawyers at 10 paces. The in-house lawyer’s job is to protect the fund manager, not the software provider.

The ongoing dispute between AUSTRAC and the Commonwealth Bank has increased caution. No fund manager wants to be the next target for accepting money from a client without sufficient identification.

A lawyer confirmed to me there is no legal requirement for a ‘wet signature’, but there remains “apprehension that electronic identification is sufficient, leaving the reporting entity to decide whether to accept the risk”. He said it’s an “evidential thing”.

What is the solution?

The industry will not accept a ‘solution’ from a software provider who hopes its process will become widely adopted by all participants. I’m not saying these companies cannot find clients, but overall, it will not become the industry standard required.

I believe there are two roads forward to solve this inefficiency dogging the industry.

First, a company or body that carries Government support and the confidence of the industry should develop an industry standard. Ideally, an applicant would be approved once, given a code or PIN, and this would be accepted by all fund managers. Such a body might be under the auspices of the FSC or the ASX or even Australia Post, with the support of ASIC and the ATO. An industry group would interpret the law and gain agreement across the industry.

Second, it should work off the APIR standard, which has been used for identifying and coding data for unlisted products since 1993. The Superannuation Product Identification Number (SPIN) is an APIR code and with a fund’s ABN, is accredited by the ATO for SuperStream.

Make it easier to invest

With fintech, regtech, robo advice, AI, machine learning, blockchain and a thousand other technologies flying into the funds management industry from all directions, it’s inconceivable that applicants should fill in 12 pages every time they invest with another fund manager. The industry must work to a common solution for the sake of everyone’s efficiency.

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