How SWF is disrupting the finance industry

Andrew Ward is the Managing Director at SelfWealth (ASX:SWF). Finfeed took time out with him to discuss the rise of SWF and how the finance industry is being disrupted.

The views and opinions expressed in this article are those of Andrew Ward. You should not act on these views or opinions without undertaking your own due diligence as to the voracity and accuracy of these views and opinions.

Finfeed: Can you tell us how SelfWealth came to be?

Andrew Ward (AW): The concept for SelfWealth was born late 2011.

I had worked in the financial services industry for nigh on 20 years and was fed up with the high fees associated with the traditional value chain of: fund managers; administration platforms and financial planners.

Thinking if anyone could become a self-directed investor, I could. The only option at that time was to jump over the chasm to online share broking – the likes of CommSec and E*TRADE....

However, I very quickly realised I did value the services I was shunning, namely: portfolio construction; administration; reporting and financial advice. SelfWealth was to bring diluted versions of these services to the online broking world, where there was either too much research, or not enough.

The first challenge was to identify the optimum way to construct portfolios for a burgeoning Member base. Wanting to offer a subscription based service without percentage or asset based fees, I hit my first roadblock as fund managers and stockbrokers either wouldn’t provide a set fee, or wouldn’t release their IP for the Community to follow.

It was at this point the lightbulb went off – why can’t I use the collaborative intelligence from the Community to construct the portfolios – a social peer-to-peer network was born!

There is no greater herd mentality than with investing, so the challenge was to find a way to cut through the noise and stop the lemmings going over the cliff. SelfWealth indeed proved past raw performance is not indicative of future raw performance.

Two key diagnostic tools were developed to solve this problem. The SafetyRating and WealthCheck Score are these diagnostic tools. In essence they bring “Modern Portfolio Theory” into the digital world. For each portfolio they measure:

• Diversification
• Asset allocation
• Valuation
• Peer-to-Peer comparison and performance
  • Across 30,000+ portfolios

These two diagnostic tools are a much better proxy for future outperformance against the benchmark. Members search and filter for the best investors based on these tools and not performance alone. SelfWealth then helps them to construct better performing portfolios to outperform.

It should be noted here that SWF remains a speculative stock itself, so investors should seek professional financial advice if considering this stock for their portfolio.

By the 2015 the Community had grown steadily and we were continually improving the user experience (UI). The consistent feedback was the Members wanted to stay within the solution to execute their trades rather than having to go off to an external broker with their buy and sell orders which SelfWealth had generated for them.

Wanting to be consistent with the ethos of no “percentage sign”, I began the search for a flat fee brokerage solution. I was told all up and down town, both with the dominant players in the market, but also the smaller ones, that this could not be done. The ASX has two percentage based fess, clearing and settlement. The incumbent online brokers did not want to take the risk for larger trades, so had a published rate up to $10,000 (typically) and then a sliding percentage based fee after that, based on the size of the trade.

After having the door closed on me too many times to remember, I finally was able to a strike a deal with Pershing Securities (Bank of New York Mellon’s Australian presence).

Flat free brokerage was offered to Australian investing public for the first time in September of 2016. $9.50 flat fee trades irrespective of trade size.

Based on a tiered monthly rate based on volume of trades, this deal was a risk/reward scenario for both parties. However, within a short period of time, based on the successful launch and promotion of the solution, SelfWealth could break even and become profitable on each trade.

SelfWealth has subsequently transitioned across to OpenMarkets for clearing and settlement with a superior flat fee brokerage arrangements. This transition also increases elements of SelfWealth other revenue streams and will allow direct international trading (through Saxo) in 2018.

FF: Your vision is to be Australia’s Number 1 low cost, flat fee online share broker. How do you expect to achieve this aim?

AW: The simple answer is: just executing on a simple plan, which we have had great success with to date.

There are ~700,000 active online trading investors in Australia and at 5%, or 35,000 traders, SelfWealth becomes a Top 10 online broker by market share. The banks control ~75% of the market and with their bricks and mortar, high staff numbers and legacy computer systems not housed in the cloud, it is not plausible or commercially viable for them to drop their headline rates to lower than $9.50, let alone the risk of a flat fee structure like SelfWealth.

The competitors will not come from the incumbents (for the reasons mentioned above), however we are not ignorant enough to realise the competition will come from another entrant to the market such as a SelfWealth. By the time they come to market, SelfWealth will have established the beachhead, the brand and will control the market share for low cost and flat fee brokerage. Similar to tech businesses in other industries such as Seek, carsales.com.au and realestate.com.au, being first to market is a powerful barrier to entry in its own right.

FF: How do you differentiate yourself from other online brokers?

AW: We are now entering the era of stockbroking 3.0.

Stockbroking 1.0 is traditional stockbroking house as we know it. Speaking to an actual stockbroker who traded on your behalf.

Stockbroking 2.0 was the advent of online trading in the 1990s.

Stockbroking 3.0 is the coming of age of cloud computing and housing your trading systems in sites such as Amazon Web Services (AWS). This enables significant scalability instantly, removes the need for expensive and increasingly old legacy in-house architecture and also removes the necessity for high staff numbers.

SelfWealth is the first of the 3.0 brokers to launch in Australia.

SelfWealth also is Australia’s only flat fee online trader.

SelfWealth also distinguishes itself from other brokers with its own Social Network – it’s peer-to-peer Community. Using complex machine learning and artificial intelligence (AI) diagnostic tools to filter and rank the best investors in the Network, investors can construct outperforming portfolios. The larger the Community swells (well over 30,000 now), the smarter it becomes. This is also unique to Australia.

FF: What do you feel are the inherent problems in the industry and what solutions have you created to combat these problems?

AW: Trust is top of mind for the investing public today. With the Royal Commission into the bank getting under way shortly, the underbelly of the large institutions will be exposed.

When the spotlight is applied, it is inevitable the high fees and commissions they charge will be scrutinised. With the advent of technical advancement and nimble players entering the market with lower cost bases, these high fees are becoming increasingly harder to defend, especially when the services they offer are not superior to the new entrants. Most of the time they are inferior, especially when it comes to customer service, user experience and the integration of digital services such as apps.

While the larger institutions still control market share, CommSec, E*TRADE etc...they tend to be blinkered and not notice the competition coming, so remain the dinosaurs they are and will not improve their solutions or their pricing, as they feel impenetrable and focus more on other parts of their business (traditional banking) which is getting more airtime.

SelfWealth been constructed from the ground up with all these inherent problems of the incumbents in its sights. Whilst SelfWealth’s pricing, technology and scalability are compelling, the immediate challenge is building brand and trust. Once this is achieved, the larger institutions should have nothing to stand on, or defend.

FF: What do you feel investors want to see from their brokers that isn’t being delivered?

AW: The most common feedback SelfWealth receives to our Customer Support, is that other online brokers don’t offer portfolio construction tools.

They either offer too mush generic research from companies such as Morningstar, or not enough. Also, this research rarely walks you through constructing a share portfolio to outperform over the long term. How many stocks should you own, how well diversified should I be? ETFs or not ETFs? How well am I actually going? You may well be self-directed, but you are out on your own swimming with the sharks.

Benchmarking yourself is crucial when it comes to understanding whether your strategy is effective or not. What is the point of outperforming the market (ASX200) by 5%, when 95% of other investors are outperforming you....?

SelfWealth delivers this missing piece of the puzzle.
Affordable direct international share trading is also creeping up the priority list for investors. If you could trade international shares on the same cost basis as your domestic shares, view your total portfolio as one and settle out of the same cash account, investors will be drawn to your solution.

FF: What do you feel is the general public sentiment around the industry at the moment?

AW: Distrust and indifference at the status quo.

Until new entrants can effectively shake up the oligopoly and they take notice and act to defend their turf, the investing public appears a little apathetic.

The attitude until now has been – well, since there is no alternative to pay high fees and commissions and I don’t really understand how the industry works/is connected, I suppose I’ll just cop it. It appears a “dark art”.

The announcement of the Royal Commission has been welcomed and probably seen as overdue.

The success and fast growth of the Fintech industry in Australia reflects this discontent, as new entrants are exposing the profits and inefficiency of the existing services, especially in online trading.

FF: Cost is certainly an issue – what has been behind the high fees being charged and do you see this reversing?

AW: The larger online brokers, CommSec, E*TRADE for example, have traditionally been owned by the banks. Banks actually control ~75% of the online trading market share. Until recently, banks were the only institutions able to afford to launch an online trading solution.

They have sunk hundreds of millions of dollars into their solutions and these costs need to be recovered. A recent example saw nabtrade spending ~$250mill on upgrading their ageing nab online investing portal to bring it into today’s world. Marry this with their bricks and mortar, HR overheads and running their in-house systems, they cannot compete with the likes of new cloud based entrants with low costs bases, such as SelfWealth.

It would not be commercially viable for the incumbents to match a $9.50 flat fee trade, however even if they did run a short campaign at these levels, where is the motivation to churn and leave SelfWealth for a $9 fee, forgetting the social tools on offer as well? There is certainly motivation to change brokers when escaping a $29.95 fee (up to $10k) to a $9.50 flat fee.

FF: how does the business model WORK?

AW: SelfWealth currently has 3 revenue streams.

• Trading
  • $9.50 flat free trades
  • This is not a loss leader for the business, as we make a significant margin from these trades
• Premium offering
  • Complimentary for the first 90 days and then $20 per month
  • The Premium offering allows access to the Community and Social Network of 30,000+ portfolios.
    • Portfolio construction tools
    • Benchmarking
    • “Members Like You”
    • Detailed portfolio analysis
    • Social news feed on those portfolio Members you are “watching”. Anytime they buy or sell, you are instantly notified
  • Cash Account
    • SelfWealth earns the RBA cash rate +0.5% (currently 2%) on all cash held in the omnibus cash account held with ANZ
    • SelfWealth pays no interest to our Members on this cash account
    • Average cash account is ~$15k
    • As at December 2017, there was $29mill held in Member cash accounts

SelfWealth will introduce a further 2 revenue streams in 2018:-

• Exchange Traded Funds
  • SelfWealth will list the SelfWealth SMSF200 ETF (ticker: SELF) on the ASX in 2018.
    • This powered by the ~30,000 SMSFs portfolios in the solution and constructed using SelfWealth’s proprietary WealthCheck score
    • Proven outperformance over its benchmark – the ASX200
  • SelfWealth will charge 0.82% for this ETF with ~70% profit margin at scale
• International Share Trading
  • Courtesy of our integration with OpenMarkets and their arrangement with Saxo

FF: You say you will be increasing your marketing spend to accelerate growth – what are the growth expectations for 2018?

AW: We will be increasing our marketing spend on a national basis to $900k per quarter from January 2018 and expect this to generate 1,800 new active members each quarter.

It should be noted that these figures are currently projections and investors should seek all publicly available information before making an investment decision with regard to this stock.

New users will be sourced from a mix of digital, radio and out of home advertising in addition to a growing number of members being sourced from word of mouth and our popular SelfWealth member referral program. This referral program provides both the existing member and the new member 5 free trades each on the new member joining our service.

FF: How is the company growing – what are the projections and what is the current trajectory?

AW: SelfWealth has experienced an excellent level of growth since launching it’s $9.50 flat fee online trading service in support of its Social Network investor offering. Whilst we expect continued levels of strong growth, SelfWealth being a recently listed ASX company and a relatively new entrant in the online share trading market, has not provided projections to the market at this time.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.