The domino principle: are traditional retail funds set to roll over?

Is the boom in master trust and wrap services the beginning of the end for ad-visers channelling their clients' money directly into managed funds?

Is the boom in master trust and wrap services the beginning of the end for ad-visers channelling their clients' money directly into managed funds?

The advent of master trusts and wrap accounts has certainly created a stir in the financial services industry in the past few years. You only need to look at the blaze of publicity surrounding these developments. How many new product offerings have had four entire conferences devoted to them in the space of a year? And, how many have provoked endless debate, both in newspaper columns and in the office?

It seems, though, that the hype surrounding master trusts and wraps may not be overstated. Inflows into these products are increasing and many industry players are convinced that financial planners are now favouring master trusts and wraps as their chosen medium for placing clients' funds into managed funds.

The latest Assirt market share survey for the June quarter has shown inflows into master trusts growing by 15 per cent, to $41.1 billion. In the past year, the total net inflows into master trusts was slightly more than $7.8 billion.

A fortnight ago, Money Management quoted the head of retail at Australia's largest retail fund manager, BT Funds Management, saying inflows into master trusts and wrap accounts at BT had increased in five years from 20 per cent to about 70 per cent of total retail revenue today. Rob Coombe also notes a second trend emerging in the distribution of managed funds -- customers are increasingly buying into such product offerings direct from manufacturers such as BT.

Is it a case of out with the old and in with the new? Are managed funds more likely to be accessed through master funds and wraps than as a stand alone investment unit for investors?

Rob Coombe says that although BT has enjoyed increased inflows in master trusts and wraps, there will always be a place for retail products, apart from their place in master trusts and wraps.

"There are still advisers out there who are writing retail. Not all advisers are heavily into wraps. And clients who are cost-conscious, or who like to do the consolidated reporting themselves, for example the DIY investor, or someone with a smaller amount of money to invest, will still put their money directly into retail," he said.

Coombe says, however, that the administrative convenience both the planner and the client enjoys with master trusts and wraps means that larger dollars are going directly into these products.

This is a view shared by Perpetual Investment's general manger of retail, Gerard Doherty.

"Certainly, I think for a client with more than $100,000 to invest, the best sense would be to go through a master trust or a wrap," Doherty said.

However, like Coombe, Doherty argues that there will always be a section of investors which will invest directly in managed funds.

"There'll still be reasonable inflows into retail products, particularly when planners deal with savers rather than people with large lumps of money," he said.

While the new spate of master trusts and wrap services has resulted in the upper end of investors enjoying less administrative headaches in dealing with their portfolios, a new market is opening up for the manufacturers of managed funds -- the direct market.

Coombe says Australia will follow the US trend in direct investment. In the US, the direct market peaked at about 30 per cent, and was largely constituted of smaller investment amounts.

"I don't want to overstate it, as I still see investments predominantly being placed by advisers. The larger end of town and superannuation is still an adviser domain in the US and I think if the US is anything to go by, this situation is still five years off yet," Coombe said.

However, Westpac Financial Services' head of retail Michael Migro says the distribution of managed funds directly placed by planners is alive and kicking at Westpac.

"Traditional retail is dead from a financial advice perspective, but from Westpac's perspective, it is alive and well. We deal with the traditional retirement and rollover market, but we are also dealing with normal people with normal money invested in term deposits and cash management trusts, among other things."

Migro argues that while the traditional retail market has predominantly focused on retiree and rollover funds, there is a newer segment that has been opening up over the past five years, which now constitutes half of all inflows in Westpac's non-wrap retail products. This has been a diverse bank customer base, which is increasingly pouring funds into non-wrap retail from the untapped lower dollar end of the market.

This view is echoed by Perpetual's Gerard Doherty, who believes this market will survive by shifting its focus from the rollover and high net worth client to smaller, and mostly younger, investors.

"For investors with less money, master trusts and wraps are less viable. There has been a growth in direct investment in retail, for example with E*Trade, Commonwealth Funds Direct and Greenline, Doherty says.

"The cake is getting bigger and there's room in the cake for clients to go direct. Younger people are also putting money away into retail funds and today's rollover market is still predominantly investing in managed funds."

One person who isn't about to panic over the demise of planners placing their clients money directly into managed funds is Mercantile Mutual's general manager of retail funds management, Paul Bedbrook.

Bedbrook says that three quarters of Mercantile Mutual's business is retail.

"We've seen major increases in retail inflows. A minority of the market uses master trusts and wraps, and the market is changing, but we're not there yet," he said.

Like Migro and Doherty, Bedbrook says inflows into retail products are coming from various new sources.

He also feels retail product manufacturers are now able to compete with master trusts and wraps on the key issue of pricing.

"It is all about which product is going to be cheaper for the client. In the end, a client doesn't necessarily pay less for master trusts and wraps. Our nil entry products are very attractive to investors," Bedbrook said.

Not all master trusts and wraps are able to offer clients the full range of investments that traditional retail products can, according to Bedbrook.

"Annuities and pensions may exist in master trusts, but they are not the cheapest on offer, and capital guaranteed products are not necessarily in master trusts. There are certain products retail has, but master trusts and wraps don't."

At the other end of the spectrum, Paul Resnik has been a vocal member of the doomsayer brigade for traditional retail funds for quite a while now. He argues that planners are finally realising the benefits of master trusts and wrap services for several reasons, not least of which is control over the pricing of products.

Master trusts and wraps offer financial planners, who are the distributors of the product, their first chance to control the pricing of a product. With the traditional retail product, this power is vested with the manufacturer. Resnik says he is not surprised that master trusts and wraps have been embraced by planners.

"I thought they would've picked up quicker," he said.

How much of this change in planners' attitudes towards master trusts and wraps can be seen in the marketing efforts of the fund managers?

Mercantile Mutual's Paul Bedbrook says the increase in inflows to these products at BT can be traced to its marketing prowess.

"I would say that's a BT experience, based on BT product design and marketing," Bedbrook said.

Certainly, Michael Migro says the growth of direct investment is largely dependent on brands. Migro points out that bigger name brands in the industry like BT, Mercantile Mutual and Colonial First State will all win in the direct market.

Rob Coombe says he believes the future of traditional retail funds is still strong, despite the popularity of master trusts and wrap services.

"Ten years ago, it was