Managed funds and trusts
How to bundle investments with a wrap or master trust
Why is your financial adviser hell-bent on signing you up?
What are wraps and master trusts?
Wraps and master trusts are a convenient way to bundle your investments together. Wraps let you hold all your managed funds and direct shares together, while master trusts let you hold just your managed funds under one portfolio.
Why would you consider a wrap or master trust?
Unless you're already rich – you wouldn't! If you only have a little money to play with, then consider some other options for managing your money. But if you have a significant amount of wealth under your belt, consider these pros and cons:
- 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.
- Online access.
- Can provide a single report at tax-time, plus fees may be tax deductible with certain platforms.
- Fees can be charged 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.
Are they worth it?
ASIC offers some no-nonsense advice for consumers considering a wrap fund. The key take-out is to make sure the convenience factor is for your benefit, not your financial adviser's. Remember, it's your money, so ask them if this type of wrap or trust is best for you – not them.
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 any ongoing adviser fees), which is less than the overall costs of many wrap or master trust 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. Fees don't seem as important to investors when the market is going well. But when markets go down, investors should 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 wraps and master trusts 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. You'll need to factor adviser costs into your decision.
It's a trap!
As with any financial product, you have to be aware of a bunch of other complex elements playing in the background and look out for traps.
- The way they're sold. Some platforms are only available through financial planners, who you will then likely have to go through to makes changes or execute transactions – for a fee.
- What choice? Some financial planning houses recommend just one wrap or master trust provider. Ask your planner how many platforms they recommend and the reasons for those recommendations (find out about fees and if there's any mark-up to wholesale fund fees).
- Is it 'open access'? An in-house fund may be operated by your financial planner and open only to the clients of their business. If you want to change adviser, you may have to leave the fund, possibly involving exit fees and capital gains tax. Open access funds let you change adviser without leaving the fund.
- Complexity. You'll probably need to use a spreadsheet to compare fees for different platforms. All costs are set out in product disclosure statements, but understanding and comparing the myriad fees and other details in brochures running to more than 50 pages can be very difficult.
- Limited choice of funds. The fund manager marketing the platform may not include all available funds on its investment menu.
- What choice and features do you need? Some platforms offer hundreds of investment choices but there's no point paying for options you won't use. One fund manager told us that around 80% of investors in some 'full-service' platforms have money in just 20% of the available funds.
- 'Nil entry fee' options can be more expensive. This is because you may pay higher ongoing and/or exit fees instead (this may also be true for ordinary managed funds).
- Platforms pushing their own products. Be aware that the wrap or master trust provider may include many of its own managed funds.
- Choosing the wrong one. There's a platform for almost everyone now, including smaller investors. Making your choice based on short-term needs may be ill-advised — a master trust geared to small amounts may be suitable now but what about in a few years when your investment has (hopefully) grown? If you decide to switch to another more suitable master trust you might end up with a pretty hefty capital gains tax bill when leaving the old one. This doesn't apply to wraps, which allow you to transfer in and out without triggering a capital gain or loss.
Fees you'll pay
- 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, and there are platforms with 0% entry fees out there (though they tend to offset the free entry with other fees). 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.
- Ongoing fees. 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. The Future of Financial Advice (FoFA) reforms have put the brakes on outright commissions, but ongoing fees still exist. And the FoFA reforms don't apply to adviser relationships established before July 2013.
- 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 may 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.
- 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.
Tips to avoid the fees
- Don't pay the full entry fee. It can be as high as five per cent or more of what you invest and can go to the financial planner or adviser – but this is negotiable. Wrap and master trust application forms often include a box advisers can tick to rebate the entry fee. Ask them about it or compare what different advisers will charge you.
- Keep bargaining. 'Adviser service fees' can sometimes be rebated or 'dialed down' by advisers.
- If you already know the platform you want, consider using a discount broker – they'll often refund upfront fees and part of any ongoing fees.
- If you don't require advice (or you're prepared to pay for fee-for-service advice separately) and you're interested in investing directly, it's worth comparing these and other discount brokers' fees and services.
- Some discount brokers charge a fee to mail product disclosure statements to you!
Checklist for investing
- Your situation: How much have you got to invest? Entry amounts vary, but $50,000–$100,000 is recommended as the minimum starting amount to effectively invest in some wrap and master trust portfolio platforms. Some platforms penalise small amounts through transaction and annual fees, while others have lower minimums and are suitable for investors with smaller amounts.
- Features: What choice of funds do you need? Will a cheaper managed fund suffice, or do you need the service and choice a portfolio platform provides? Do you want to trade shares or move money between funds? Do you need extra features such as insurance or margin loans?
- Costs: Have you compared platform, fund manager and adviser costs to find the best value for your needs?
- Service: How quickly are reports generated and transactions, such as switches between managed funds, carried out? Some platforms can execute your transaction orders on the same day; with others it can take weeks.
- Tax: What tax will you pay? Do you have confidence in the company running the platform? Wrap and master trust providers can be wound up or taken over. If this happens, you may need to switch to another platform and this could trigger a big capital gains tax liability. This depends on the type of platform.
- Advice: Consider getting professional tax and financial advice for this often complicated area. It's recommended that you do regular reviews (annually) to make sure your investment strategy remains aligned with your needs.
Baby wraps: The first platforms were designed for investors with hundreds of thousands of dollars, with some providing up to 600 investment options. These weren't appropriate for smaller investors so 'baby wraps' were born to fill this gap. They're also sometimes known as 'lite' platforms and 'mini-master trusts'.
Investor Directed Portfolio Service (IDPS): The Australian Securities and Investment Commission's official term to describe master trusts and wrap accounts.
Master trust: An investment vehicle enabling individual investors or super funds to invest in one or more underlying investment, usually wholesale managed funds. They allow access to a selection of fund managers (either chosen by you from the master trust's list, or chosen by the master trust manager). Assets are held on behalf of the client. The trustee is the legal owner.
Portfolio platforms: A generic name for wraps and master trusts.
Wrap accounts: Similar to master trusts, except you get ownership of all the investments you make, which are 'wrapped' up in one administration system. As with master trusts, your accounting, reporting and tax are taken care of; you'll get a single consolidated report at tax year-end. Assets are held in the client's name as the legal and beneficial owner (this may differ for super).