The big get bigger, the small get the picture

There are now more than 120 different master trusts on offer in Australia. Some think this number will grow, others say it will shrink to less than 10.Simon Segallooks at the reasons behind the divergence of opinion.

Most would agree that Australia's master trust and wrap account industry is a success story with a huge future. What is less certain is which of the existing players will survive, why the big could get even bigger and what factors will drive growth.

Analysts Rice Kachor reckon the industry will surge from a $35 billion market value in 1999 to reach $186 billion in 2007 - and thus outstrip super investment vehicles such as corporate superannuation funds.

Following a study earlier this year by US-based research group Cerulli Associates, much has been made about a looming shake-out of the master trust/ wrap account industry. Cerulli predicts that largely because of the growing importance of independent financial planners in distributing managed funds, a mere five master trust and wrap providers will survive price wars and industry consolidation (Money Management April 13, 2000).

The research finds the groups to emerge winners will be the more innovative ones who are best able to capitalise on shifting trends in the financial services industry.

Investor Security Group managing director Rob Keavney is one who too anticipates a consolidation in the master trust industry for four reasons. He cites price competition, the growth of cheaper methods to create consolidated reports, more robust media scrutiny on trail commissions and the trend towards direct billing which reduces the need for master trusts.

He argues that new systems and products are evolving which deliver what master trusts do, namely consolidated reports and ongoing revenue for dealers.

"Systems can now report and consolidate any data whether inside or outside the trust and irrespective of the asset. At the same time, the trend is towards earning the same revenue from all products and to bill clients directly."

Sydney-based independent research group Look Research, which assisted Cerulli with its report, expects the shake-out will not be at the dealer group level but in the number of dealer groups who do their own office administration.

Director Tom Collins estimates that of the 30-40 groups who currently administer their own master trusts, only five or six will continue to do so.

"The rest will outsource administration functions," Collins says.

But he believes the number of master trust/ wrap account products available in the marketplace will grow due to the re-badging and co-branding of the products of the remaining administrators.

Thus investors will perceive a growing number of products but they will actually be sourced from a shrinking number of providers.

With new start-ups, Michael Rice, managing director of Phillips Fox Actuaries and Consultants, does not anticipate a huge change in the overall number of master trusts which he puts at about 100.

The players, however, could change. Rice cites five factors driving the industry's rationalisation. These include restructuring at parent company level (such as with Commonwealth and Colonial and with National and MLC); an inability to reach the critical mass needed to be profitable; the formation of alliances to share costs; a greater focus on profit rather than market share; and huge technology spends required to maintain master trusts.

"Those that will survive will have to remain competitive around costs and services. This means adapting to technology for use in areas from research and applications through to online purchases, sales and switches," Rice says.

Garry Weaven, executive chairman of Industry Funds Services, also does not anticipate a shake-out of master trusts.

"The benefits of the products, their speed and convenience is a strong driver.

Master trusts are the obvious way, whether retail or industry funds," he says.

Weaven believes that in such a buoyant environment, economies of scale are less important than marketing and branding the products.

"Marketing will ensure growth. Even though it is not in consumer's interests to switch their money, marketing tries to persuade them. The smaller players thus have opportunities. Even though the big players have advantages around brands and technology."

Weaven expects two types of superannuation funds to emerge - master trusts with their branding and big marketing budgets and trustee-driven superannuation funds such as public-offer funds or corporate funds.

He believes that in their fiercely competitive battle for market share, industry funds will occupy the high ground of low-cost, economies-of-scale and portability, while master trusts will enjoy a marketing advantage with strong branding and sales networks.

"Master trusts will catch up," he says.

Banks and funds management groups have jumped on the bandwagon to buy into the master trust industry. The first signs of the rationalisation of master trusts was back at the end of 1997 when St George Bank paid $272 million to buy Sealcorp, the company that runs the $6 billion Asgard Capital Management Service. Look Research identifies nine deals since then involving master trusts (see table overleaf).

ASSIRT's quarterly market share report for the June quarter shows that master funds manage $53.4 billion in funds. Of this, the largest five account for two-thirds of the total master trust market. The top ten account for 91 per cent. Of the largest master funds, AMP Financial Services alone accounts for 24 per cent, Asgard 14 per cent and Norwich Union Navigator 11 per cent.

The report identifies 16 master trust managers of which the smallest is MasterPlan Managers with $285 million under management. Only three other master trust managers in the Assirt data have under $1 billion under their management - IOOF Australia ($517 million), Synergy Capital Management ($759 million) and Tyndall Life ($774 million).

Collins reckons 70 per cent of master trust money is in superannuation accounts (the rest being in ordinary retail money). He believes that as long as the law permits trusts, this structure will remain.

"And there is no hurry from government to change legislation," Collins says.

Initially, critics griped that master fund products were too expensive, too unpredictable and too costly to keep ahead of technological developments.

But the products have evolved rapidly to become the foundation of most large financial planning firms who use the money held in master trusts to sell various financial planning networks. Look Research reckons there are now well over 120 of these products offered by more than 50 providers.

Collins' partner at Look Research Leo Wassercug says understanding the differences between the plethora of master trust products has become increasingly difficult for investors and even financial planners.

Providers are increasingly adding features to their products as add-ons to the core portfolio administration service. Customers are thus being exposed to a range of products like loans, banking services, cheque books and credit cards.

This is not to mention the on-line share trading services that are only beginning to emerge and the further influence of technology on greatly improved back-office, transaction, reporting and administrative functions.

The consequences of this, notes Wassercug, are the emergence of product types that are "at worst wildly inconsistent in the areas of fees and costs, and of marginal value in terms of additional features and benefit to investors."

"To date, the real value of master trusts has been to help advisers achieve efficiencies in the ongoing management of client portfolios. There is little monetary value for investors," Wassercug says.

"Master trusts' success is in spite of hefty and often hard-to-calculate fees, a lack of any regular comprehensive survey of master trusts, and the sales commissions charged by financial advisers."

Wassercug observes that master trusts have developed an array of complex fee structures, recently moving towards charging transaction fees within individual accounts. Entry fees range from zero to 5 per cent, while ongoing fees can vary from 0.6 per cent to 2.5 per cent of the portfolio value.

Because of costs, including the cost of distribution through financial planners, and the profit motive, fees have tended to be higher for master trusts than for superannuation funds. Public offer funds usually have some automatic distribution through major participating employers or industries.

Michael Rice predicts master trust fees will fall for three main reasons: reduced costs due to electronic collection and allocation of money; the provision of educational material on a bulk electronic basis; and the payment of advisers by fees instead of commissions.

In its regular survey of public offer super funds, accountancy group KPMG found that Australia's major industry funds continue to maintain a cost advantage over competing master trusts. While the run-up to choice of fund continues to focus attention on competition, some master trusts may be closing the gap on costs for big funds. It sees some correlation between the level of costs and the numbers of investment choices offered by many master trusts.

To Rice the biggest factor is the number of employees and the average account balance.

BREAK-OUT BOX

Master trusts -

Master trusts - a trust arrangement which allows a single trustee, operating under an umbrella trust deed, to administer and manage superannuation funds - started in the early 1960s when life insurance companies began to grapple with the administrative task of setting up individual trust deeds for separate superannuation accounts. Their solution was to roll all accounts under the one "master" trust deed.

In the mid-80s, the same concept was conceived for retail investors who, now provided with administration vehicles, could invest rollover superannuation money, set up a personal super fund and even invest their non-super money.

Master trusts became convenient administrative tools for allocated pension funds. Many master trust providers offer, under their umbrella structure, easy switching of superannuation investments, built up throughout a person's working life, to allocated pensions to provide an income-stream product.

For investors master trusts promise simplicity and convenience for a range of investment choices through the one (master) trust deed, dialled from a menu of options. They also promise lower fees.

Master trust operators, armed with the buying power of pooled resources, are able to negotiate reduced management fees from fund managers and gain quick entry to the growing pot of investment dollars (and profits) flowing into fund manager coffers.

Financial advisers were sold the benefit of master trusts as a convenient way to simplify portfolio management and attractive incentive arrangements and commissions. A major reason for the success of master trusts is their in-built administration and tax functions, which allow financial planners to cut back their back-office administration and reporting and provide a better service.

"Whatever their appeal," says Look Research director Tom Collins, "master trusts have helped to define a shift in the savings and investment patterns of Australians towards simplicity and the "one-stop shop" approach to managing money."

Master trust and wrap accounts are portfolio administration and custodial services but have evolved under different regulatory regimes. In many regards they are functionally indistiguishable from each other, although some differences do remain.

With the introduction of the name Investor-Directed Portfolio Services (IDPS), the line between master trusts and wrap accounts has already been blurred by the industry regulator, the Australian Securities and Investments Commission, which is moving to treat the services as essentially identical for the purposes of regulation.

In addition to "regulatory convergence", a "market convergence" is now taking place as the skills and expertise required to administer and operate master trusts and wrap accounts become increasingly interchangeable.

TABLE

Target Co Acquired Co Value($m) Holding Date

St George Bank Sealcorp 272 100 Dec-97

MLC Godfrey Pembroke 40 100 Jun-99

Royal & Sun All. Connelly Temple 100 n/a n/a

Int Mast. Fund Man Strat Master Plan n/a 75 Apr-00

Perpetual Symetry 9.2 100 n/a

Challenger Synergy 28 100 May-00

Perpetual Wilson Dilworth 22.5 60 Dec-98

Investec ACSIS Master Trust 100 n/a n/a

Tower Bridges 168 100 Sep-00

Source: Look Research