Transcript – QAV #348 – John Winters, Superhero

QAV #348—John Winters, Superhero

Length of Audio: 01:06:50

[Intro] Cameron Reilly [00:04]: Welcome to the QAV Podcast. My name is Cameron Reilly. If you’re brand new, welcome, this is an investing podcast, we normally talk about value investing. The kind of investing made famous by guys like Warren Buffett and Charlie Munger and Howard Marks, Benjamin Graham, et cetera. My mate, Tony Kynaston in Sydney is a very successful value investor with 25 odd years of experience and he has a system that he teaches me on this podcast about how to value stocks, how to determine their intrinsic value, figure out what to buy, what to pay for it, et cetera. But today we have a terrific interview with, I guess, a superstar in the Australian Fin-tech Investing circles at the moment, John Winters, C.E.O of Superhero, one of the latest entrances in the Online Broking Category.

We’ve talked about them a bit on the show. We’ve talked about Superhero a bit recently, a number of our subscribers had questions, particularly relating to how the stocks are owned. If you acquire them through Superhero and what would happen if Superhero was to disappear overnight, what happens to the stocks? and so we invited John on to have a chat. I think we mostly clarified our concerns; I have a couple of minor niggling issues still, but they’re probably no big deal. Anyway, we’ll throw to the interview, here’s John Winters. Let me know what you think afterwards.

Cameron Reilly [01:37]: G’day, John.

John Winters [01:39]:G’day, how are you ?

Cameron Reilly [01:39]: Good! How are you?

John Winters [01:41]: Good, thanks. Now question for you is it better if I hey like, can you hear me fine? Or should I put my headphones in?

Cameron Reilly [01:49]: You sound great. The only question will be whether or not there’s any feedback coming from our voices, but at this stage, it sounds good.

John Winters [01:55]:Yeah, you sound good too.

Cameron Reilly [01:58]: Good! Well, I’m just waiting for Tony to show up. He should be here any moment now, but I will send him a text. How’s Sydney today?

John Winters [02:07]: Sydney is good. Where are you guys based?

Cameron Reilly [02:11]: Tony is in Sydney, I’m in Brisbane; the COVID free state where we come and go freely and do whatever we please. Oh, here he is!

John Winter [02:20]: Sydney is about the same though.

Cameron Reilly [02:22]: Yeah, I know, you’re getting back on track down there I see.

John Winters [02:27]: Yea.

Cameron Reilly [02:27]: Here’s the man who just lost me $5. Welcome to the show Tony. I put five bucks on one of Tony’s horses that was racing down in Melbourne today and it came last.

John Winters [02:38]: You get something for that?

Cameron Reilly [02:39]: No think I had it to win .He’s teaching me how to bet , Tony owns a few race horses and he’s teaching me how to bet on the ponies. This was my first experience. Luckily his share investing track record is better than his horses. Oh, Hey Tony, can you hear me?

Tony Kynaston [02:56]: Yeah, I can hear you now. You can shut up. That first time you’ve had a bet on one of my horses.

Cameron Reilly [03:03]: And it came last! not even like fourth or fifth , last!

Tony Kynaston [03:09]: Well you’re the common denominator on that one. The curse..

John Winters [03:12]: Yeah the Cameron curse.

Tony Kynaston [03:16]: Well, get used to it they lose more often than they win that’s for sure.

Cameron Reilly [03:21]: This sounds like a shitty , bloody hobby. All right, John, welcome, John, thanks for coming on and chatting and congratulations, let’s start with that. Congratulations on the successful launch of Superhero. What’s it been like the last couple of weeks? Kind of crazy times for you?

John Winters [03:40]: Yeah, it’s been a whirlwind. We set a target of getting to 10,000 customers by the end of 12 months and do it at the end of three weeks.

Cameron Reilly [03:53]: So does that mean you sort of suck at forecasting? What does that mean?

John Winters [03:57]: Yeah, So I guess I …

Cameron Reilly [04:01]: You were sand bagging?, Sandbagging the investors oh no, it’s not going to go that good Just keeping up their sleeves a little bit, we used to do that, back in the day

John Winters [04:10]:Yeah, exactly.

Cameron Reilly [04:10]: Well, that’s great congratulations. So, before we get into Superhero, why don’t you, tell us a little bit about your background. I sort of checked you out on LinkedIn today, it looks like you’ve been in the Broking business for quite a while.

John Winters [04:26]: Yeah. Becoming a stockbroker was sort of my childhood dream, growing up I sort of wanted to get into financial services.

Cameron Reilly [04:39]: Did you watch wall street? Is that what inspired you?

John Winters [04:41]: I think, there was probably a little bit of that. Yeah, I actually mentioned in a job interview once and they said “Oh, you probably shouldn’t mention it like that” likefor all the right reasons.

Cameron Reilly [04:55]: Did you want to be Bud Fox or Gordon Gekko , that’s the question, the good guy or the bad guy , or the bad guy who becomes a good guy, I’m not sure what is it

John Winters [05:01]: No. Certainly the good guy I think, , I called who’s the General Manager at the time is the co CEO now of Shoreham Partners. I called them every day for three months until, I think he felt sorry for me, he gave me a job, and that’s really where my career sort of kicked off. Fast forward to the end though, I do agree that a lot of the industry’ is plagued with conflicted remuneration and it’s been a major piece of starting Superhero that we can charge people as low as $5 to trade where in many circumstances you can be charged thousands for the same thing,

Tony Kynaston [05:49]: When you knocked on the door of Shaw Stockbroking everyday, did you take along a gift on the guy’s birthday like Bud Fox did in WALL STREET?

John Winters [05:57]: I should have, maybe I would have gotten the job quicker.

Cameron Reilly [06:06]: Let’s talk about where the idea for Superhero came from John. Was it your idea or somebody else?

John Winters [06:15]: Yeah, so it was mine and it was really sort of put together over my career so I was in broking for about 15 years and really struggled with how antiquated, so many of the processes were in the industry. I was involved with the listing of zip. That’s how we’ve been able to raise capital from some of the founders and, and saw the rise of this buy now pay later space, which it’s almost led the, sort of the rise of the Neo banks as well. And they’re doing real-time ID verification, they’re doing real -time issuing of credit at the checkout. And I’m sending an eight-page paper form to the staff of these sorts of companies saying, yeah, here you want to trade shares, Here’s the form, and then go down to the chemist and get them to sign and photocopy of your driver’s license, and then post that you can’t take it to the office even though in the same city, but post that to the office.

Two days later, we will set up an account and a couple of days after that, maybe we can place a trade for you. And they’re sort of looking at the watch guy, I want to get a trade on before the market closes today. And, there was no way to do that. So, it was really how do we take this old-world industry and bring it into the new world of technology. And whilst we have seen the rise of COMMSEC, they are the biggest, and they’ve always been the biggest and a big part of that is because they’re backed by the biggest bank as well. It’s very much, we went back and had a look at what their website looked like in 97 when they launched and we looked at it in 2001 during the .com boom and subsequent crash and we looked at it as it looks today and there’s definite upgrades, but it hasn’t changed a lot. It’s the same thing. So, we’ve gone from chalkboards to a digital spreadsheet on a website and there hasn’t been a huge amount of progress from there. So that’s what we’re really trying to change. We’re really trying to move the investment experience into the world of, in terms of user experience, the worlds of Uber and Netflix and how easy it is to use those sorts of products, how do we make investing accessible, but also understandable, but for a broader range of people.

Cameron Reilly [08:59]: And so that was the idea, and how long have you been working on it, putting it together?

John Winters [09:05]: Well, overnight success, two and a half years to get it off the ground.Yeah, actually started sort of the formal part of the concept thing back in late 2017 and we founded the business in early 2018.

Cameron Reilly [09:23]: So What did you spend that two and a half years doing? Can you walk us through the early life of Australia’s hottest Fin- tech startup?

John Winters [09:33]: Yeah. Well, there’s a huge amount of regulation in this space. There’s a huge amount of technology development that’s gone on and I have listened to your previous podcast where you were discussing the business. We aren’t just, buying shares and sticking them in our company account and we could run away to the Caribbean, we certainly can’t do that and particularly through the GFC, a lot of additional regulation was brought in. So there’s regulations that we have to abide by to be able to run a business live.

Cameron Reilly [10:08]: I noticed you didn’t comment. I think I said, at the time you disappear in snort cocaine off of a hooker’s breasts when you went to the Caribbean, you neglected to say, you’re not going to do that.

John Winters [10:18]: I wasn’t Sure If you’re talking about me or the Afterpay, the former Afterpay C.F.O.

Cameron Reilly [10:27]: Oh I think that’s who it was , yeah.

John Winters [10:27]: I didn’t want to comment.

Cameron Reilly [10:27]: Ok, sorry , please continue.

John Winters [10:30]: So yeah, so we spent two and a half years literally, engaging with the regulators building the technology. We’ve been audited by P.W.C and not just going through our financials. It’s doing a comprehensive control audit around all of our systems and our procedures and processes. But setting up the structures that we have, you know, these comparables in the market. So, we’re not bringing this new shiny toy to the market that no one has ever seen before, and no one’s ever done, and we’re bringing all this risk, It’s certainly not that. The closest comparison to what we are doing is probably the likes, we compare ourselves to the likes of Hub and Netwealth. We’ve taken a rap platform. We’ve built a rap platform from scratch. We’ve removed the advice intermediary and given it directly to consumers. And in building that structure, we’ve been able to build in massive efficiencies, we don’t have a room for the 200 people working on dividends and corporate actions; we’ve automated a lot of it. So, we were able to strip out a huge amount of costs and basically pass all of those efficiencies and cost savings onto our customers.

Cameron Reilly [11:55]: What’s a wrap platform. Can you explain that for us?

John Winters [11:58]: Good question. So, a wrap platform is sort of explained in its name, it basically wraps all of your investments up onto one platform; in one reporting platform. So, there’s typically a custody or a nominee service as part of it and that is exactly what we’ve got. So, we are a licensed, regulated custody provider through a separate standalone, special purpose vehicle, and that is where our customer’s shares are held. So, if Superhero was to go out of business, just to sort of recap on a couple of other comments and maybe some of your listeners had questioned, if Superhero was to go out of business, your assets are never put in jeopardy, there’s no legal claim available to an administrator or anyone to try and get those assets; they belong to you, the investor. So that structure holds all the assets and then over the top of it, there’s a full, comprehensive tax reporting system. So, when you buy shares, whether that you’ve held them for more than 12 months or less than 12 months, the system reports on that. So, it runs full realized and unrealized capital gains, whether you’ve bought and hold them over 12 months, whether you’ve sold them within or over 12 months, it works out all of your tax gains for you.

John Winters [13:30]: It runs full dividend reporting, It handles all of your franking credits and reports on all of your franking credits, foreign tax credits, capital returns, share purchase plans. It allows you to participate in share purchase plans or rights issues fully electronically through the platform, which is typically reserved for the let’s call them the 1%, the wealthier people who have large self-managed super funds and probably pay 1% of their account balance to their advisor every year. We have all of those comprehensive reports available within the platform so it holds your shares., It reports on all your shares that’s the wrap. And typically, whether it’s Macquarie Wrap or its Net Wealth, or it’s hardball, or it’s Premium, there’s these big platforms out there, they then go and do deals with stock brokers and the stock broker even my former firm, the firm would have a relationship with a wrap platform. And then I would invest in companies on behalf of my clients and the stock would then flow back and be held by that platform. So I think net wealth has $35 billion worth of funds on their platform, we’re aspiring to get to that sort of number one day but what we’ve done is we’ve taken that advisor out of the picture and said, well, why can’t you, if you just want to invest in shares yourself, why can’t you have a simplified report that shows you what dividends you got paid, what franking credits you earned instead of scrambling around a textile and trying to dig out that dividend statement for your accountant, and they can see the cash has gone into your account, but you don’t know where it’s from, and you don’t know how much you got paid per share and all of that. So, the platform does all of that on your behalf.


Cameron Reilly [15:31]: So, whereas we might use, uh, today something like Sharesight or Stock Doctor to produce those reports for us, if you’re a Superhero customer, it all gets done for you, is that correct ?

John Winters [15:44]: Correct. So, it’s very similar. So a Sharesight report would produce the same sort of thing that your Superhero report would have. Right

Cameron Reilly [15:53]: Yeah it allowed you to produce it obviously for the holdings that you’ve acquired through Superhero, not if you’ve ever used two or three different brokers or platforms.

John Winters [16:02]: Correct. That functionality., a couple of our investors have asked about that functionality and we can look at that in the future, but at the moment It’s just the investments you’ve bought on the platform.

Cameron Reilly [16:15]: Okay. So do you want to explain to us, like, how is it different from a Self-Wealth ,or an e-trade, even, I mean, online brokers have been around since the late nineties, I guess, how does Superhero compared to some of those long standing platforms, price?

John Winters [16:41]: Yeah. So, we’ve been compared to a few different companies, both here and in the U S and there’s the, what they’re saying is the “Robin Hood Effect” around the world at the moment. Our business and the Australian market are fundamentally different from the U S. I mean, there’s no sort of simple comparisons between our market and the U S market to make over here. But I guess in the simplest form we do allow people to invest in direct A.S.X listed shares in E.T.Fs. So, from that comparison, there’s no difference between us and SelfWealth and COMMSEC. The difference really is around our technology and how we have structured the business to allow those cost savings. So, what we have done is we have a custody structure and these custody structures are well-known, they’re highly regulated. They require regulatory capital like the banks do, to sit behind them to ensure that they are always protected. And some of the similar, bigger custody companies, I mentioned a couple of being hub and Netwealth, that runs similar structures, but no, there’s BNP Paribas, there’s JP Morgan, there’s H.S.B.C. These structures are typically reserved for these multi-billion dollar, multi-national entities. And we’ve been able to work through all of the red tape in allowing our business to attain one of these licenses. So, with that in mind, what the system does is it allows every single person to invest their money in individual trades. So, the three of us may place a B.H.P trade today, at three different times throughout the day and each one of us get our individual price and we buy our individual shares, and at the end of the day, we take those three trades. So, let’s say we each bought 10 B.H.P shares, and you bought yours at a $1.08 so it’s 10 bucks. I bought mine at $2 each, and you bought yours at $3 each, right? So, we’ve now got 30 shares. We’ve all got different prices. So the system at the end of the day, we’ll take those 30 shares, compress the three trades into one contract note and settle one contract note through the A.S.X.

Cameron Reilly [19:29]: All right



John Winters [19:32]: Where if you look at a SelfWealth or a COMMSEC, they will take three contract notes and settle the same stock three times. Now, if you can do three things in one, instead of three things, three times, there’s clearly efficiencies in that, right? And the A.S.X charges between a $1.00 and a $`1.50 for every single settlement onto chess. So, all of our stock, just to make it clear, all of our stock does sit on C.H.E.S.S. It’s just not on individual C.H.E.S.S Holdings. So, there is that C.H.E.S.S protection there and then we settle only once instead of three times. So, we’re saving all of these individual transaction amounts, and that’s what we’re passing on to our customers. And that’s how we bring that cost down.

Cameron Reilly [20:23]: And then they’ve obviously a record of who those holdings belong to. And I assume enough redundancy that if your head office caught on fire and the server got destroyed, somebody would be able to pick through a backup of that somewhere and work out who owned what .

John Winters [20:45]: We write it all down on the back of the envelopes we get, yeah. Yeah, absolutely that’s the beauty of the cloud. There’s no physical hardware in our office other than our laptops and our phones. That’s the way the world is moving, but yes, even the reporting and the recording of customer information and transactions and things is part of the regulatory requirements that we go through and the controls that we have to meet. And there’s absolutely multiple layers of backups and redundancy built in, whether it’s us, whether it’s through the market participant, which is open markets that you know, there’s multiple layers of records of who owns what and which transactions are allocated to who. So, if you think about the structure, the similar sort of businesses that are running things like us, it’s probably a share registry or C.H.E.S.S itself, right? And by the way, C.H.E.S.S, Like, let’s talk about that for a second. The A.S.X is busy trying to replace it. So, let’s not get too caught up about everyone having a hit and it’s 25-year-old technology.

Cameron Reilly [22:02]: Okay. Tony

Tony Kynaston [22:03]: Yes. Hello. Hi, John.

Cameron Reilly [22:04]: Oh shut up. Let you jump in.

Tony Kynaston [22:07]: Oh, no. that was an interesting discussion. I think the whole crux of the matter is the custodian structure, and that allows you to get some of the cost savings you’re talking about, I guess, but it’s a unique structure in terms of how people tried and how their shares are held. So, I guess that’s enough of it. I did pick up, I think, somewhere in your T’s and C’s, I went to your website today and did a bit of research. I did pick up somewhere that you have to have cash in your account before the trade can go through. So that’s a bit different than how the stockbroker normally works, we get T plus two days to settle. So, I guess you’re also getting a bit of an interest kick from holding onto that cash for a couple of days, too.


John Winters [22:56]: Yeah. The interest rights around the world at the moment is sky high, as well as huge amount of profit there. I can guarantee on it, that the interest rate is a big fat zero, so there’s no interest being paid. And, and if there was interest being paid, we’d love to pass that onto our customers because, I think there’s limited sources of interest these days. And if there was a meaningful amount, I think that would be a great value add it’s not a revenue line that we would rely on to take that, but in terms of our structure being unique, I’d probably challenge that. It’s actually not a unique structure. We see it all over the industry. We’re just running, we’re just doing it in a much more efficient way, the rules and regulations apply to us as they do for all of these other companies that run this structure.

Tony Kynaston [23:50]: No, could I accept that and I’ve used the structure before, I guess if listeners want to know what that structure might look like most of the big companies, if you go to their top 10 shareholders, you’ll see things listed like XYZ, Macquarie Bank, custodian, trust, number one as custodian for A.B.C Corp or something like that. So, the structures are used widely, I guess, the difference and I don’t mean to sound this in a negative way, the difference is, generally you have a big bank standing behind those custodian structures. I know you said before, if the shit hit the fan, that people’s monies are safe and all that and I’m not saying it’s not with Superhero as well, but the hurdle it mentally, I would have to get over if a custodian went if something happened to a custodian that I’d invested in, but Macquarie Bank was backing it, then I would think there’s more resources available to unpick the code, unpick the individual holdings, stand behind.

John Winters [24:54]: I get that. I think, what we’re trying to achieve. We really want to make investing more accessible, more understandable, and more affordable to our customers and to the market as a whole and I think there’s a number of, I’m going to be nice here, there’s a number of challenges the Australian banks are facing in terms of keeping up with today’s demands around technology and the FinTech industry as a whole, and certainly, what we’ve seen is, if we go and do a deal with a bank, we become, it’s basically that Superhero owned by XYZ bank. And that’s what people I think don’t want. Why, does it need to be NAB behind it? Why does it need to be Macquarie behind it? Why does it need to be CVA? and I think we want to be independent and we are fiercely independent and we’ve backed ourselves and we’ve got the capital behind us to ensure that those structures are able to meet all of the license requirements. And in terms of our backers, some quite high-profile Australian business people behind the business who would not be named in the media and who would not even have anything to do with us, if there was any risk of their reputation or their capital as well, because our investors are invested, they have capital invested in a Superhero account as well. So, there’s obviously, if NAB came along and offered us a massive check to take a big swag of the company and it was sort of thumbs up to everyone well then fine, but I think there’s more to it than just having a bank behind you to have a bank behind it.

Tony Kynaston [27:04]: No, I understand. Yeah, that’s good. Well, I’ve got a list of questions here. Let me go through them. You’re offering free E.T.F trades. Why is that the case and no other shares as well?


John Winters [27:17]: Yeah. So, there is still a marginal cost on providing free brokerage on A.T.S which we’ve agreed to absorb across our business. We’ve worked closely with open markets or market participants to be able to offer that to investors, but really, we want to, even though our headline brokerage rate is $5 flat fee per trade, we want to encourage people to start investing, and we want to encourage people to make long-term investment decisions. And if you can remove the cost friction from making those decisions, then it’s better in the long run. So, we would prefer a hundred thousand people who come on and invest only a few times, then have 10,000 people who are investing every day.

Tony Kynaston [28:15]: Why is that?

John Winters [28:18]: Because we want people to make long, good long-term investment decisions. So, whilst, activity is a driver for our business, I would rather have more people trading less than, more than less people trading more.

Tony Kynaston [28:35]: When you talk about free trade for E.T.Fs, is there a definition of that? Does it include L.I.C s or does it include some of the more exotic E.T.Fs? Like one of the ones that we have looked at is called G.E.A.R Which is a good, I think, BataShares E.T.F. Would that be counted as a free trade?

John Winters [28:55]: Yeah, it is.

Tony Kynaston [28:55]:What about listed investment companies?

John Winters [28:59]: Listed investment companies that are not , they carry the $5 trade.

Tony Kynaston [29:04]: Okay. I think I saw it on the website as well. That you were allowing trading on about 22,000 and something shares are all the shares on the ASX available for training,

John Winters [29:17]: Unless we’ve missed a couple. Yeah, we’ve got about 27. I think it’s 2,750 securities entitled, including the E.T.Fs. Okay. We’ve got them all.

Tony Kynaston [29:27]: Okay, good. So, you don’t limit the size of the company before you’re allowed to be trading on your platform at all.

John Winters [29:32]: No

Tony Kynaston  [29:34]:Okay. I guess a question from my hip pocket, is there an upper limit on the trades that you do on your platform?

John Winters [29:42]:Yeah, was a really interesting one when we were building the platform and setting a potential limit like that. In my career at shore and Macquarie, we had limits and it wasn’t even our money and those sorts of things were in place to ensure that people didn’t make fat fingered mistakes and punch in an extra zero. We certainly didn’t want to be seen to be saying it’s $5 brokerage, but not living up to our names. So where do you draw the line? Do you draw it at 50 K, do you draw it a hundred, do you draw it at five-hundred, do you draw, do you put no limit? So, we do have a requirement that you cannot buy shares unless you’ve got money in your account. And there’s two reasons for that and it’s mostly a business risk point for us because you could go and buy shares and then not front up with the cash in two days. And there’s limited recourse. We don’t want to run a credit business, so you have to have the cash but also you then can’t potentially manipulate the market by placing trades that you may never settle on and you don’t have that fat finger problem either you can only trade the amount you’ve got. But to answer your question directly, we have got a limit on the trade size and at the moment it’s set at $500,000.

Cameron Reilly [31:14]: Tony wants to know if he can place 50 mil in terms of investments on it five bucks looking at your group of backers. John, can you buy shares using Afterpay and zip is a BMPL friendly, paid it off over three easy installments?

John Winters [31:34]: Buy your shares now and pay later , It all works well until the share price goes down and then people don’t really want to pay back later.

Cameron Reilly [31:43]: But that’s Afterpay’s problem, not your problem, right?

John Winters [31:46]: Yeah. look we don’t offer margin. I know a bunch of the U.S guys do, I had a couple of clients over my career that had margin lending accounts and it’s great for a certain purpose. but you know, I think it does bring an inherent amount of risk into your investments and your portfolio that typically don’t need to be there but psychologically, it’s really interesting how we do work because if I said to you, here’s a hundred K I’ll give I’ll lend you $900,000, go and invest a million bucks in the market. You’d probably say, are you crazy? But we’d do it into a property any day. So, it’s the psychology there is really interesting, but no we don’t want to be offering margin lending. So certainly not at this stage, and if we did ever do it and we haven’t even considered it, it didn’t need to be in a very controlled environment.

Tony Kynaston  [32:55]:Is the, end-user doing their own execution on your platform or does it go through to somebody who keys in the trade for them and gets the best price?

John Winters [33:05]: Yeah and that’s direct market access. So, I would say, yeah, 99.5% of the time, it is automatically routed through to the market and generally hits the market within milliseconds. There is a best execution policy and that does have a term in there that in some circumstances, in some cases, if a trade does trigger a flag, it can be sent through to a human who will review the trade before putting it on. And I’ve seen that happen over my career where, you’ll get, they’re called, D.T.Rs -Designated Trading Representatives and I’ll give you a call and say what’s this trade. Why does the customer want to do that? You know, who are they? What are they doing? and really just sort of understand it. And there’s regulations and checks behind all of that as well. So, most of the time it’s direct into the market but there is scope for the market participant to pull trades out ad hoc or review.


Tony Kynaston [34:08]: Okay. If it’s strict trade what kind of trades are you offering? Are you offering, at market trades or are there also limit trades, stop-loss trades and other sorts as well?

John Winters [34:18]: Yeah, so we’ve launched with two trade types. So, we’ve got market track, market orders, and we’ve got limit orders. So, the market order looks at what the market is, and if you’re buying, it will go and buy at the lowest seller price and the opposite for a sell. So as a seller, it will sell at the highest buyer in the market. For a limit order you can set the price that you want to trade at, and your order will go in at that price.

Tony Kynaston [34:49]: Okay. Getting back to your comment before about consolidating settlements at day end, is there any sort of risk in there for a participant If there’s a disruption between the execution of a trade and consolidated settlement at day end?

John Winters [35:08]: No. So, we don’t actually carry the consolidation process on our side, that’s done by our licensed market participant on our behalf. So, they handle that with the A.S.X directly.

Tony Kynaston [35:23]: Yeah. But they haven’t settled yet, but something’s happened, there’s a huge power outage, a meteorite hit Sydney Harbour, and I’ve bought my 10 shares of BHP at two o’clock and you don’t settle overnight, what happens?

John Winters [35:38]: Well I think we’ve probably all got bigger problem than meteorites hitting Sydney Harbour . But it’s all automated in terms of the settlement process our participant does hold an additional amount of capital on our behalf to cover any transactions. So again, there’s multiple layers of redundancies to ensure that trades do not fail and that the system, will continue to operate business continuity, processes and things.

Tony Kynaston [36:18]: Okay. Just getting my head around the custodian process again. So there’s on the chest registry., there’s one H.I.N for Superhero, and then in your systems underneath that you break it down into account IDs of some sort and split it up on your platform?

John Winters [36:36]: Yeah, so, we’ve got an institutional H.I.N with, the I.S,X, with C.H.E.S.S and the sub-ledger is run on our system.

Tony Kynaston [36:46]: Okay. So how then do, just walk me through how a dividend works its way through your institutional H.I.N into my account, both from a cash point of view, and I guess a tax point of view as well.

John Winters [36:58]: Yeah, sure. So unfortunately you still have to pay your taxes , there’s no getting around that.

Tony Kynaston [37:02]: You cant pay for five bucks for us,

John Winters [37:08]:But it’s interesting. Someone got to pay a 1 cent dividend the other day, fully frank. So, the company will pay and these are, as I said, it’s not, it’s not unique to Superhero. These are tried and tested processes, we are an institution with the likes of Computershare and link and you know, these are the processes and things that these major organizations have in place. We have the same processes in place. So, when a dividend is paid, we aren’t paid the dividend. So, the custodian is, the funds are paid into our custody account, but we are not liable for the tax on that dividend. Right. So, we don’t have any beneficial right to that or legal right to own, to take, we don’t have proprietary rights to those assets, all those funds. So what happens is, and this is, we’re quite proud of this, that the system is fully automated in this respect where ,you will be alerted of the dividend when the company goes ex-dividend and don’t, it sounds like you guys haven’t signed up to Superhero, so I’ll keep watching to see when you guys have, yeah,

Cameron Reilly [38:29]: I have, I’ve done a trade, testing it out yeah.

John Winters [38:32]: Oh brilliant. We haven’t taken your off to the Caribbean yet. It’s still safe. So, if you go into the dashboard, when you log in under pending transactions your dividend, which has gone ex it will show, C.B.A has gone ex-dividend and there’s the,1500 bucks worth of dividends that expected to come in with the payment date on your payment date, it will hit your account. The cash actually hit your account and you will have in your activity, if you then go to activity, it will say you were paid an interim dividend from C.B.A. Here’s the amount per share, here’s the franking credits, you can download a dividend statement, or you can download your income report, which is the comprehensive tax report off the platform.

Tony Kynaston [39:27]: Okay. So, when I get a dividend statement from the C.B.A under a traditional model, I get a piece of paper from C.B.A or from their register from computer share with C.B.A on top of all those details. Do I still get that on your platform or do I rely on your reporting on the platform?

John Winters [39:44]: Yeah, So one come from Computershare , Computershare will send us a dividend statement for all of our holders, for all of our clients that hold Computershare and you will get a Superhero dividend statement, which has your C.B.A dividend on it.

Tony Kynaston [40:05]: Okay.

Tony Kynaston [40:07]: So in terms of tax, in terms of income, in terms of franking credits, there is no difference.

Tony Kynaston [40:12]: Right. What about when it comes time to vote my shares at the Commonwealth bank I.G.M? How does that work?

John Winters [40:19]:Yeah, sure. Same process so you can participate in votes, you can participate in rights issues, entitlements share, purchase plans. All of these things are written into the Corporations’ Act under these sorts of structures. So, you can participate as any other shareholder would naturally work.

Tony Kynaston [40:42]: And they normally ask me for my S.R.N or HIIN. So how do I go about doing that? Do I use yours ?

John Winters [40:48]: Yeah, so on the platform, you can participate on the platform. So, once you log in, you don’t need to put in any of those details and those are some of the user experience pieces that we’re trying to achieve is that you don’t need to go and get that form and find out what your SRN number is, and then work out what in your address is wrong and all of this kind of stuff. I’ve been through it; I’m sure you guys have been through it as well. We’re trying to simplify the whole thing. So all you need to do is say, I want to vote for, or I don’t think the directors should get paid that much money, I want to vote against them and push your votes through in a way you go,

Tony Kynaston [41:28]:Okay. And you can send proxies to people as well?

John Winters [41:30]:Yes, you can.

Tony Kynaston [41:32]: Okay. All right. There was a bit of press in the last six months or so about Robin hood in the States and how they sell their data to market participants who can then use it to adjust their strategies. Is that something that, or do you guys sell any data at all to anyone in Australia?

John Winters [41:52]: No, we don’t and we won’t .The U.S market is very different to the Australian market. So, in the U S there’s market makers and market makers are typically high frequency trading firms, and that will sit in the market and they’ll create a market. So, there’ll be a bunch of buyers, and there’ll be a bunch of sellers. And what Robin hood does is when they sell to one of those, market-makers the market makers pay them and there’s a spread, or there’s a fee or something that gets paid back to that. You can’t do that in Australia, under Australian law. So, there’s market integrity rules in Australia, and those market integrity rules, state that it is against the law to create a false or misleading market. If you created a market in a stock, it’s creating a false market, it’s not a natural market. So, market making in Australia it’s against the market Integrity rules, ASIC has outlawed it, you cannot do it. So, we don’t sell order flow, you can’t sell order flow, there’s no way to do it. All of our orders go through a market participant and directly into the market.

We will never know under the A.S.X rules and the ASIC rules. You never know who the counter party is to a share trade in Australia, unless you’ve done an off-market transfer to your family trust or something. You don’t know who the counter party is. It just goes into the pot and whoever’s on the other side of the order is on the other side. So whilst we are compared to the likes of Robin hood, they’ve seen absolutely spectacular growth in their customer numbers and their trading numbers and their volumes and things and we would love to see that sort of growth in our business it would be fantastic but we certainly have a very differentiated revenue model,

Tony Kynaston [43:53]:And that’s the end of my questions. Thanks. If you’ve got any more?

Cameron Reilly [43:56]: Yeah, just one or two quick ones, John. So, I can’t remember when I signed up how much demographic data, I had to give you, but do you collect demographic data and are you able to produce reports on who’s buying what? and the reason I ask is we read a lot of analysis saying that a lot of the people pushing up after price, after pay, share price after the COVID calf new punters who were just getting into the market, I assume a lot of your early uptake might be from those sorts of people.

Are you producing reports on generally speaking, who’s doing what? Who are they 20-year-olds? Are they 50-year-olds? Or is that something you’re not paying attention to?

John Winters [44:46]: Yeah, No, We have had a look into the details and in terms of the data that we capture on the way in, we catch a name, your date of birth, your address, your mobile number, email address, and your agenda. The only piece through that you could probably argue, we could use your mobile number or your email address. Robin hood was just recently hacked by the way, they were only using email address to verify we’re using mobile as well. Someone had hacked their email and then reset their password through their email and then got in and transferred all the cash out of Robin hood; you cannot do that with us. There’re too many safeguards and, we’ve got two factor authentication on all of it. But in terms of the data, we know how old people are and we need that for our AML ID checks and we have done some segmentation around who’s trading what and it’s actually been quite fascinating. So, the biggest cohort is not 18- to 22-year-olds, It’s 35- to 45-year-olds.

So, it’s like the light millennials to the early gen Xs and those that’s the cohort who’s been in the workforce for, you know, 15, 20 years. They understand the importance of wealth creation. They may own a home or be looking to buy a home or have started have a young family and trying to build their wealth. But it’s very interesting that from the youngest, the 18-year-olds on the platform through to the oldest who, I think is about 81. Zip is one of the top holdings across every demographic. Now, I’m not sure if that’s because of the fact that people can touch and feel their product every day. You know you can experience their business by going across the road to the shops you can be going to Westfield and you and it’s everywhere.

So, you know, is consumer tech being uplifted because people can use those products every day. So, they want to sort of own a share in it. it’s also volatile. It’s also volatile stock potentially people are trading more frequently, but interesting as well. One of the other companies that popped up last week was Dow. It was a new entrant onto the market. They are basically selling banking as a service. So, it’s a white label bank, Aussie Neo Bank and it was the, it was the boomers who were the biggest, who are the biggest investors in that which was quite interesting. So, we are starting to see, we’re starting to see Fortescue Commonwealth Bank, Telstra come into the millennial demographic as the biggest holdings the ZIPS, the Afterpays and the tier two Buy Now Pay Later Guys. They’re, all up there but they’re, co-mingled with the, you the top 20 stocks on the Market.

Cameron Reilly [48:14 ]: And what about stuff like the average trade that goes across your platform? Can you tell us anything about those sorts of numbers? Is it small, is it big?

John Winters [48:22]: Yeah, so our minimum trade size is a hundred dollars so we are seeing people come on and putting a hundred dollars into the market and a lot of people are then following on with larger trade sizes. So, you know, they may be testing it out, getting a feel for the platform. The average I.S.X trade size is around 15 K we’re seeing, averages probably around half that.

Tony Kynaston [48:52]: Yeah. Interesting. I guess that’s the question I had. Generally, if you have lower barriers to try, because the commissions are cheaper, because the technology’s better, et cetera, do you see people increase the frequency of their trading?

John Winters [49:05]: Yeah. Interesting one and I’ve been speaking to a few people about this. It’s like, everyone’s a champion of low fees until they go to zero and then it’s somehow irresponsible. So again, it’s a psychology pace rather than, I think you can’t say that low fees are good and then say, low fees are bad, you can’t do that. It’s either good or bad and I think people, number of market commentators are suggesting that free or very low fee brokerage is increasing, the propensity to trade. I think particularly my demographic millennials, I think they are more concerned about the thousand or 2000 or $5,000 they’re investing. Then they’re worried more about how much they’re going to make, rather than should I make less because I’m paying COMMSEC 20 bucks when I can actually pay to be here at 5.00. They’re thinking about how much they can gain. So, if they can reduce their costs, if they’re going to, if you’re going to trade, you’re going to trade. Like, that’s the end of the story. So how can you do it at the lowest cost in the lowest cost way? Yeah, but I think people, are more concerned around their return on investment from their investment rather than the fees being too high or too low.

Tony Kynaston [50:40]: Yeah, that’s great. I guess my question didn’t have a moral dimension to it from my point of view. I don’t care how often people try it’s up to them. We’ve got a nanny state in Australia is pretty big as it is. Are you seeing frequencies that are more frequent than average compared to the I.S.X?

John Winters [50:59]: No, we’re not before we launched, we obviously built a business model and forecast and, it’s great to have smashed the forecast on a customer basis. But we actually modeled and I speak to self-worth I’ve spoken to them quite regularly since we launched, but we modeled our business on SelfWealth because they’re the only sort of listed Australian peer who released their data and their average. So, they’re active traders who is someone who’s traded or has a funded account. I’m not sure about the time period, but they had across their active traders, it was nine trades per active trader per month.

Tony Kynaston [51:42]: Right.

John Winters [51:43]: We forecast three

Tony Kynaston [51:44]: You forecast three? , and what you’re doing ?

John Winters [51:46]: We forecast three trades per customer per month.

Tony Kynaston [51:49]: And are you doing that ?or is it more or less below that?

John Winters [51:53 ]: It was way below that , it was slightly below that and that’s not a bad thing for me. I’m not in disappointed in that. I genuinely don’t want to see rampant speculation across the platform and I do think that overtrading in the long run, doesn’t help your overall investment strategy.

Tony Kynaston [52:15]: Absolutely, I agree with that. Yeah.

Cameron Reilly [52:17]: Tony and I were just talking yesterday, about and I don’t think in our portfolio, we do with the show and I think we, we sold G.E.A.R but it’s the only because it breached its cell line for us, but it’s the only trade we’ve done since May I think, we’ve just been sitting on stuff. So, we’re big believers in buy and hold.

John Winters [52:39]: You probably would have done well if you’ve held since may.

Cameron Reilly [52:42]: Yeah, you’re right.

John Winters [52:46]: Got any Zip and Afterpay?

Tony Kynaston [52:48]: No.

Cameron Reilly [52:49]: No.

Tony Kynaston [52:50]: No. Our show is called Quality at Value and I might be calling, [cross-talking 52:56] be that criteria, unfortunately, but.

Cameron Reilly [53:01]: One last, sorry, one last question can, before you sound like you’re wrapping it up. We’ve been talking about $5 trades, but there is another fee structure I think we should mention. Yes. Which is the it’s an annual subscription, I think. Is it charged monthly or is it just the calculated monthly?

John Winters [53:16]: it’s a nine dollar a month subscription and at the moment, there’s no charge through to January next year, so you can sign up and get all of the features for free. It’s been a little bit controversial actually and I know you guys spoke about it a couple of weeks ago or was it a couple of weeks ago on the $9 fee? The $9 fee is optional. So, you can have a free account. So theoretically you could sign up, you can come on for free, you could fund your account, you could buy some E.T. Fs which are free brokerage and it will cost you nothing. All you’re paying is the cost of the E.T.Fs. And you can do that for shares as well.

There’s, significant costs from the A.S.X in terms of displaying data. So, we’ve got data licenses from the A.S.X that costs us a fortune and we also have the consolidated tax reporting, which you can go and get for 1% of your portfolio amount with a minimum of probably a couple of grand, if you went to some of these other platforms, so where we’re giving away that full reporting, we’re giving away additional functionality and live pricing across the entire platform. Not just when you click in to make a trade, your watch lists your holdings, everything on the platform is live A.S.X data. And that obviously carries significant cost. And we’ve tried to reduce that as much as possible, and we’ve been able to reduce it down to $9 a month.

Tony Kynaston [54:48]: Right. Okay and the difference between the free profile and the $9 a month profile, is that just greater flexibility functionality or does it affect execution of trades or what’s the next?

John Winters [54:59]: Oh, it doesn’t affect the execution. It also, the execution is direct straight through to the market. The difference is we have limited the data to 20-minute delay data, which still carries a cost to us, but it is greatly reduced. It’s 20-minute delay data. The reporting that we offer is everything you need to do your tax return. But, it’s not the full, comprehensive portfolio performance and detailed, realized and unrealized capital gains reports that you get for $9 a month. It’s portfolio statements, transaction statements that you can give to your accountant and do your tax. What it also has is you can place dollar values of trades. So, it’s a market order. So, you can say, I want to invest a thousand or 5,000 or $10,000 into say an E.T.F or into a stock so it’s got limited functionality around the trade types, but your orders go straight through to the market. It’s 99.5% it’s going straight into the market in real time. So, there are some limited features and the 20-minute delay data is the key. We don’t have that major costs associated to us and that’s why that account is free.

Tony Kynaston [56:17]: Okay, and the bank account that we would use if we signed up, is that one that you provide, or can we take our current bank accounts and link it?

John Winters [56:25]: No. So, you’d be settling through your Superhero account, right? So, all of the cash is held by N.A.B. So as, the license authorized deposit institution, so all the cash is held by N.A.B. It sends all of your trades settle out of the N.A.B account but now you can’t bring your own bank account, which is pretty standard across a number of online, companies.

Tony Kynaston [56:51]: One of the reasons why the bank set up be tried in COMMSEC and those kinds of things. Yeah.

John Winters [56:55]: And it’s great for their business, they use it as a funding source for the homeowner things.

Tony Kynaston [57:00]: Hey, just one last question about that custodial structure you’ve got, I just entered into Google as we were talking, what happens when a custodian fails and it came back and said in the US anyway, the government eventually stands behind the assets on trust. That’s in the US is there a similar buyout guarantee provided in Australia that you’re aware of?

John Winters [57:24]: There is limits though, right? There are limits on all of those and it’s the same with a bank account in Australia, there’s a limit, if you’ve got two 10,000 million dollars in your bank account and the bank went out of business, then you’re good for 250 K, but you’ve lost your 9.75 million bucks. Right. So, we do have a cap through the national guarantee fund but what we’ve done is we’ve gone sort of above that and secured our own insurance. So, we have our own insurances to protect our customers, which is well into the millions and that’s on a per claim basis. So, it’s on a per customer claim that they would be able to coordinate. But it is extremely rare. I haven’t personally seen any certainly across my career but I haven’t seen in my experience or throughout history of custodian collapsing, certainly businesses have collapsed that have held stock on their own balance sheet. That is not what is happening here. It is a registered custody business, and it’s got regulatory capital to back it up as well. So, it’s got a Cape, a level of net tangible assets in place at all times for a business to fail, under the red tape that Australia has implemented would be highly unlikely.

Tony Kynaston [59:00]: Okay, good.

Cameron Reilly [59:01]: Thanks John. So, one last question and I’ll let you go. So, $5 fee, the key marketing message that I’ve seen about Superhero since you launched is the $5 fee. What do you expect competitive forces to do? Are you expecting the rest of the industry to try and match that? Can they match that even if it’s a loss leader strategy, what happens if they do match that what’s your competitive proposition when Self-wealth is charging $5 for example?

John Winters [59:33]: Yep. So, I understand the sort of the market forces behind our competitors and I would challenge Self-wealth to go to five bucks. I don’t think they have a sustainable business and there’s some pretty hefty cost structures behind businesses like that and we went through a process to look at you building out a cheaper version. I think it would be a massive compliment if COMMSEC even sort of knew who we were. I’m not sure they do, maybe they do, if they do great but I don’t think concept’s going to rip up 75% of their revenue, to compete with the Superhero and I think that is a massive opportunity that we have. And it’s the opportunity that FinTech has had in Australia is that we are able to bring these efficiencies to these old school problems and challenge, major established incumbents and institutions with a reinvented user experience and a recut value proposition, the definition of disruption,.

Tony Kynaston [1:00:50]: Yeah, Cameron and I were talking about examples of that kind of mentality from the other side, just recently, I’m sure the people at C.B.A aren’t sitting back and going, Oh, what’s the Superhero disrupted there and we’re never going to be bothered by them.

Tony Kynaston [1:01:02]: A really interesting, a quick 30 seconds on that really interesting example of that was So, were the incumbent buy now pay later company. And they were like, who’s this, who’s the zip coming along with effectively a digitized version of their product. The rest is history, right? Yup.

Cameron Reilly [1:01:20]: Well, history hasn’t finished being written yet. Yet have to see what’s going to happen in the beginning.

John Winters [1:01:27]: That’s pretty strong [inaudible1:01:28].

Cameron Reilly [1:01:29]: Yeah, I was around in the.com days when D store and Wishlist, we’re going to end retailing in Australia forever, too when they’re long dead and buried because the big guys just came if it took them a while, but they eventually just came along and stomped on them and they disappeared. But hopefully innovation is great for consumers. So yeah, it’s always sad to me when startups get crushed by the big established guys using buckets of cash and lawyers and acquisitions and all that kind of stuff. So, I hope you, and all these others guys succeed.

John Winters [1:02:08]: Yeah. When you see misinformation being spread around, against, businesses that are really just trying to have a crack, it’s disappointing, but it’s the challenge. So you run hard and you play hard and, we’ll try and build a big business.

Cameron Reilly [1:02:24]: I was in a meeting with some senior Telstra Execs back in the days of the three Amigos, where one of the Amigos, say that their strategy regarding startups was to kill the baby in the crib, which I was appalled at because.

John Winters [1:02:42]: I used to go buy them and stick them in the bottom drawer. Right?

Cameron Reilly [1:02:46]: Yeah, exactly. Yeah. Well, or just hit them with a bunch of lawsuits that would take them five years to dig themselves out from underneath. If that doesn’t work by them and put them in the bottom shelf.

Cameron Reilly [1:02:59]: All right, John. Well, listen, thanks again for coming on. Terrific to chat to you, congratulations on the success, you and to Tony. One of the first things that Tony said when we started this show is the first step that every investor needs to think about is cutting your fees as much as possible that you tend to lose a lot of your gains through fund management fees and brokerage fees. So, we are certainly big supporters of the low fee ethic. And I want to congratulate you guys for taking it to a new level in Australia. Hope it works for you.

John Winters [1:03:40]: And I thank you. I appreciate it.

Tony Kynaston [1:03:43]: Good luck, John. Thanks for coming on.

Cameron Reilly [1:03:44]: Thanks Tony. I’ll be watching to see when you sign up.

Tony Kynaston [1:03:47]: When you lift the cap up to 50 million.

John Winters [1:03:5]: Yeah. I’d say I think the terms and conditions say, if you want to place a trade larger than that, you have to call us.

Tony Kynaston [01:03:58]: What’s your number?

John Winters [01:04:00]: I will email you my number. Ann’s got my number.

Cameron Reilly [1:04:03]: I’ve got his number. Alright, John. Enjoy the rest of your day.

John Winters [1:04:07]: Thanks guys.

Tony Kynaston [1:04:08]: Thanks.

John Winters [1:04:08]: Great.to, see you guys.

Tony Kynaston [1:04:09]: Bye.

[Outro] Cameron Reilly [1:04:10]: Well, that’s the end of the free episode for this week for the brand-new folks. I want you to know that each week we have a free episode and a premium episode. If you want to check out the premium episodes, you can go up to our website, qavpodcast.com.edu, and sign up for the two-week free trial. You get to have a look at the premium episodes. You get to have a look at the checklist, the getting started guide all of the video content that we have. you get invited to our VIP dinners and our VIP zoom calls for club members. You get to ask Tony questions that we can answer. You get to get invited to our Facebook group, our private Facebook group, et cetera, et cetera. So, and also, we get a private club member newsletter each week. We send out as well with some stuff in it.

So, check that out. qavpodcast.com that to you. But as I said, if you’re brand new and you want to, you’re trying to figure out what’s going on, go back and listen to season three, episodes, 1, 3, and 5. 301, 303, and 305. And then you might also want to go back and listen to season one as well. All of the free episodes in season one, where we go into a lot of detail about Tony’s system and methodology and figure out if this is right for you. If it’s something that you want to go further with, if you want to learn how to invest like Tony does, then you can check out the, QAV club. The other thing I always have to say is we’re not financial advisors, so don’t take anything you hear on this as financial advice. This is just here to teach how one guy invests and thinks about investing. If you need financial advice or tax advice, please go see a financial advisor or a tax advisor. With that stay safe, good luck with your investing and we’ll be back next week.

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