You may have seen an article, which appeared in the AFR this morning titled “Netwealth and HUB 24 smashed by rate cuts”.
The article was explaining that as interest rates reduce, investors could end up with a negative return after fees.
“The second successive cut in the official cash rate this year has raised the prospect of thousands of account holders at two of the country’s fastest growing specialist investment platforms earning a negative net return on their cash.”
“Netwealth and Hub24 make about a quarter to a third of their revenue each year from the spread charged on the interest earned on cash that is sitting in accounts waiting to be deployed. Analysts call this the cash margin revenue.”
The article is correct in explaining that a reduction in interest rates will affect these two companies share price, and at the same time could result in negative returns to investors with cash in their portfolio. However, it fails to properly contextualise and explain the benefits of investing through platforms.
The purpose of this note below is not to explain all these platform benefits in any detail, rather we wanted to explain how Horizon Wealth uses both the efficiencies of the platforms and their low costs for the benefit of our clients.
For years, the administration platforms were quite expensive – particularly for smaller investors – as a percentage of their portfolio. That cost ranged from around 67 to 77 bps.
Over the years, through competition, that cost has reduced exponentially through the commoditisation of administration (platform costs) as a result of the efficiencies that have been gained through the streamlining of technology and straight through processing. As a result, the large bulk of the administration today is actually captured at the Adviser’s office.
Platform costs are now approximately only 5 to 20 bps for the majority of our clients and these are now capped at a client level by most of the major Platform Providers. Thus, for clients with larger / multiple portfolios the cost of administration is a fraction of what it once was.
In order for Platform Providers to offer capped and, apparently uneconomic administration costs, some, who were more aggressive on their headline administration fee, have used the cash account interest rate offered to investors to cross subsidise their total revenues, in order to maintain and grow their profitability.
The Horizon Wealth approach
As you would know, we deliberately maintain very low cash balances on your portfolio and sweep any excess cash above agreed limits into your investments, on a monthly basis. This means that you are always maximising your return on your overall portfolio by ensuring that you do not hold unnecessary cash superfluous to your needs.
Likewise, any cash shortfall causes a sale of nominated investments, in order to replenish the cash to the agreed level. This mostly occurs when clients are withdrawing money on a regular basis such as for statutory pension purposes or cash flow requirements.
We have negotiated low administration fees (with caps at a client not portfolio/account level) with the Platform Providers on your behalf. All negotiated rebates are passed back to you in full.
It is a fully transparent model ensuring that you pay the least amount of administration fees and at the same time ensuring that you maximise the returns available on any surplus cash in each of your portfolios.