05.Fees and performance
The main reasons to invest in a wrap or master trust are to get a single report for all your investments at tax time, a choice of investments and the ability to invest in ‘wholesale’ managed funds. But these features may come at a price. Investing through platforms can be more expensive than ‘single manager’ investment funds.
Here are some typical fees and commissions (this article looks at non-super investments and some of these fees also apply to ordinary managed funds):
Entry or contribution fees: up to 5% (but likely to be less) of your initial and subsequent investments may be immediately swallowed up in entry fees that go to the adviser. However there’s room to negotiate (see How to save thousands in fees for more). You can’t usually bypass the adviser and go direct to the platform to avoid entry fees — wraps and master trusts are often designed to keep planners in the loop. If you don’t need advice or you’re prepared to pay for it separately, discount brokers are an option;
Trail commissions: around 0.5% to 1% of your investment may be paid annually by the company to your financial planner — even if you don’t ask for further advice;
Adviser service fees: from nil to 2% of your investment each year. They’re negotiated with your adviser and debited from your account each month. Can be in addition to other ongoing fees;
Administration fees: charged by the wrap or master trust to administer your account. This is sometimes known as the account fee, which may or may not include some of the other fees we describe;
Fund management fees: what you pay underlying investment funds to manage and invest your money (this may or not be bundled with the platform administration fee or ongoing fee). Typically wholesale funds available through wraps and master trusts have annual fees of around 0.5–1%, usually lower than what retail managed funds cost; and
Other fees include costs to switch between investment funds and transaction costs (for example, to buy shares), which are sometimes included in the platform’s administration fee. Switches are usually ‘free’ but the difference between the buy and sell price can be a cost of the transaction.
Check out our tips about How to save thousands in fees
Doing the sums
In some platforms, ongoing annual costs can be around 2.3% of your investment each year, depending on the product and funds chosen. If you add the adviser service fee, costs can exceed 4% per year. You may get access to cheaper wholesale funds but look at the overall costs, advice and the features you’re paying for.
Ordinary managed funds generally cost around 1.5% to 2% each year (including the management fee and adviser trail), which is less than the overall costs of some platforms. Index funds and exchange traded funds cost less than 1% per year. So think about the costs of wraps and master trusts before you commit.
Investment fees can have a big impact on your long-term returns, especially when share prices decline. Up until last year, the Australian share market had a very good run — fees don’t seem as important to investors when the market is going well. But when markets go down, people really focus on the costs and their impact. Remember, if you’re paying 2–3% in fees each year, that’s what your funds need to return for you just to break even. Initial ‘getting-in’ costs, adviser fees, and trying to keep ahead of inflation can make the investment hill even steeper to climb.
How do they perform?
The returns you’ll receive from wraps and master trusts depend on the funds chosen from the investment menu, tax, fees and other factors like how quickly your transaction instructions are carried out. Before choosing a platform, it’s a good idea to decide on the type of funds you’re interested in. Compare their track record, read up on features and consider getting expert financial advice. Compare returns net of tax and fees to get a realistic picture.
One thing we know for sure is that high fees will take a significant chunk out of your investment returns. If you invest $50,000, paying a 4% entry fee and annual fees that are just 1% higher per annum than an investor with the same portfolio who has their entry fees rebated, after 10 years you’ll be almost $18,700 poorer than the second investor who avoids the entry fee and higher annual fees. The flipside is that because investing can be complicated and risky, many people need professional advice. This advice may be commission- or fee-based, but either way you’ll need to factor the cost into your decision.