Future of fees is a matter for the people

As investor and adviser support continues to favour master trusts, attention has turned to their sustainability and the ability for master trusts to evolve with market expectations.

One of the issues to be drawn particularly under the spotlight is master trust fees, and whether they are likely to increase or decrease in the future.

The focus on master trust fees has been driven by the common criticism that master trusts’ fee structures are confusing, that they are not transparent and lack any sort of breakdown which is meaningful to an investor.

While the development of new products may challenge master trusts based on this criticism, it will also force master trusts to review their fee structures and overcome their shortcomings.

The question of the future direction of master trust fees is not an easy question to answer, however, it is recognised throughout the industry that Colonial First State has made significant inroads into making more sense of master trust fees.

In May this year, Colonial launched its own master trust offering, FirstChoice, which has attracted the attention of not only consumers, but industry rivals as well.

Through FirstChoice, Colonial has targeted a sector of the master trust market which has been left untapped — the mum and dad investors of the retail market.

As well as creating its own individual market sector, Colonial has also removed much of the complexity associated with the master trust market and replaced it with a simpler fee structure.

According to Colonial First State general manager of distribution Michael Cant, FirstChoice will become the flagship investment platform for financial advisers across the Colonial/ Commonwealth Bank group, with the product also being offered to other independent financial advisers and dealer groups.

“We saw an opportunity. There are parts of the market that were looking for something that was a lot simpler, had an adviser perspective, with less fees to have to explain to the client,” Cant says.

“For a lot of mum and dad clients, some quarters have been criticised as being too expensive, but this is better value for the dollar, as well as being complementary to other platforms. We’ve tried to appeal to a segment of the market which is under represented at the moment.”

Cant says the fund manager offers FirstChoice without asset management, administration and transaction based fees, choosing instead to charge investors one single fee based on the asset classes they invest in through the master trust.

He says the fees will range from 1.95 per cent of assets for all Australian equities investment options to 1.55 per cent for more conservative asset classes.

“We believe the driver in fees is really all about getting the balance right with the advisers and getting a competitive product for the clients, offering reasonable value for money,” Cant says.

“FirstChoice is intended to be a fairly different style offering. We think it’s a crowded market, where everyone is chasing the same space, and where many advisers are shying away from traditional master funds,” he says.

The significance of this development for the master trust industry is that it goes against the way master trusts are historically designed — where they are reliant on the adviser to communicate the benefits and cost structures of the master trusts to clients. Here, investors can understand these for themselves.

According to Rothschild Australia Asset Management director Stephen Karrasch, this shift to the investor is ultimately where the future fees of master trusts lies.

“Fees are an issue of value for money. A lot of consumers and advisers lose context, and that value for money is critical at the consumer level. At the adviser level, the key is quality of advice and matching the appropriate fee for the quality of advice given,” Karrasch says.

“Advisers lose context of value for money, instead they look straight at fees. Often consumers and advisers don’t know what they are getting. So, clearly the drivers at the consumer level is value for money, competition, scale and sophistication.”

Karrasch says product specialisation and sophistication will have a major impact on the future direction of fees, as master trusts increasingly market and differentiate their product offering from the competition.

Further, separately managed accounts and fund-of-funds will also enter into the debate, giving greater value to the investor and adviser, with the fees likely to reflect this.

Resnik Consulting founder Paul Resnik says the difficulty in assessing the future direction of master trust fees are the various contributors to the fees themselves, including administration, support software and what is paid to the planners.

“However, fees are constantly being driven downwards, because there is a fair amount of competition. But will they ever get down to zero? No,” he says.

Resnik believes this is because people who work with master trusts have costs to bare, which include paying the office lease, reinvesting in software, licensing and professional indemnity insurance.

Despite this, Resnik says if master trust providers wanted to reduce fees, there would need to be a significant shift in the process, such as using an exchange traded fund to cut down on costs.

“This is a highly competitive marketplace. There are so many suppliers. But internally, fees will gradually decrease to a little below from where they are now,” he says.

As well as the platform providers trying to challenge the limits of their master trusts’ fee structure, Resnik says another challenge will be to tailor the master trust to the needs of the client and charge them accordingly.

“Discriminatory pricing is still at a developing stage,” he says.

“Wraps have been around, give or take, 10 years. Basically, it hasn’t had an aggressive market player arrive. No-one has come in and said ‘We’ll show you who’s boss’. Someone has to come in with deep pockets,” he says.

As master trusts have been around for some time, they can no longer be viewed upon as being a new product. And with master trusts now seen as being a commodity, fees will plateau.