01.Is it FoFA proof?
If a wrap fund is a good fit for your financial circumstances, choose one that will comply with FoFA requirements or that charges fees for specific services that are clearly outlined in the agreement between you and your adviser.
Wrap funds consolidate various financial holdings – from savings to share portfolios and managed funds – into a single account. One key advantage is a single statement of your financial position, which is good for keeping your financial life in order and making tax preparation less painful. And wrap funds are also becoming easier to open.
Consumers in existing wrap funds should have a candid conversation with their adviser to make sure they understand the fees being charged and which services they are paying for.
At a minimum, demand an annual statement of fees, no commissions, and no payments to advisers based on how many products they sell.
Are they worth it?
ASIC offers some no-nonsense advice and things to consider for consumers considering a wrap fund.
- Access to a wide range of managed funds, investments and fund managers.
- A single consolidated report instead of individual reports for every investment or account.
- Potentially lower management fees if you have access to wholesale funds.
- You can be charged fees for wrap fund administration, moving money in and out of the fund, management of different investment options and performance reports plus an overall service fee from your financial adviser.
- You may be locked into a particular adviser firm and have to liquidate the account as well as pay capital gains and an exit fee if you want to take your business elsewhere.
- Advisers may be recommending these funds for their own convenience, not yours.
In funds that don’t meet FoFA standards, clients are paying an inflated price that, in part, funds the rebates to the adviser or their licence holder.
- Krystyna Weston, SimpleWrap
If the Future of Financial
Advice (FoFA) reforms that
come into play in July next
year have the hoped-for effect,
the financial advice industry will
begin its long-overdue transformation
from a sales-driven to a purely
But the new rules against conflict of
interest in the selling process will only
apply to advice relationships that start
after the reforms become mandatory in July 2013.
For existing accounts, incentives to
recommend one product over
another will still be in full
swing. And for complicated
financial products such
as wrap funds, it
can be especially
hard to know what qualifies as impartial
advice, when you’re getting it, and how
much you’re paying for what.
According to Rachael
Wade, a financial planner at IAC
Robertson, competition has resulted
in most wrap funds eliminating or
significantly reducing the minimum
amount that must be retained in the
working cash account. But, with FoFA around the corner,
perhaps the wider availability of wrap
funds is no accident. Putting everything
in the same box may be a way for
advisers to keep hidden fees hidden
and charge you for making simple
changes to the account – the
equivalent of moving
money from a
savings to a
Regardless of the
remuneration scheme, wrap funds
opened before July next year will be
vulnerable to the same kind of adviser-serving
incentives that FoFA aims
Suzanne Haddan, an independent
financial adviser and director of the
BFG Group, confirms that the FoFA
reforms “don’t deal with existing
[wrap fund] clients, [and] financial
advisers continue to receive volume
bonuses. These are bonuses calculated
on the amount consolidated in the
Business as usual could mean a field
day for advisers intent on keeping clients
in the dark, Haddan warns. “FoFA is
quarantining existing wrap fund
agreements, and they’re being turned
into a money-making tool by some
of the bigger funds.
“We recommend wrap funds,
but we don’t get paid for
recommending or implementing a change to a client’s fund. Advisers shouldn't be charging extra commissions or brokerage fees to do that.”
Krystyna Weston, co-founder and
director of SimpleWrap, echoes Haddan’s
view. “In funds that don’t meet FoFA
standards, clients are paying an inflated
price that, in part, funds the rebates to
the adviser or their licence holder.”
Funds that voluntarily abide by the FoFA
regulations before these officially come
into effect this year don’t provide
commissions or incentives for
advisers to favour certain products.
Weston says smart consumers should
question advisers to make sure their
wrap fund meets FoFA standards – and
best suits their financial needs.
Asking questions to work out the fee
structure of any fund is always a good
idea in any case. Travis Morien, director
of Australian Independent Financial Advisers (AIFA), says it’s becoming
increasingly difficult for consumers to
make informed decisions about wrap
funds without putting themselves at
the mercy of the adviser.
disclosure statement is not always
publicly available to consumers – it’s
often hidden away in an advisers-only
section of a website,” he says.
According to some industry players
CHOICE spoke to, there are ways to avoid
being gouged, even if you open a wrap
fund before the FoFA reforms become
mandatory. AMP spokesperson Renae
McGregor argues the management
strategy and fee structure of the company’s
wrap funds is open to negotiation.
“Any fees paid are set between the
adviser and the client,” says McGregor.
“We don’t pay advisers for transferring
money into our wrap fund. If a customer
has agreed to pay an adviser a member
advice fee, we can facilitate that by
automatically deducting it from the
account. We would only deduct what
the client has agreed to pay in the
That may be the case, but Weston
says consumers need to take a hands-on
approach to keeping advisers honest.
“FoFA has made it slightly more complex
for consumers [in a pre-FoFA wrap
fund],” she says.
Weston believes the solution is to take
charge of the situation. “Always ask your
adviser if the advice they are giving you
is in your best interest. Understand how
the product they are suggesting operates
and ask if they receive a rebate and how
much it is.”