Hard times refuse to roll around

Master trusts and wrap accounts are the epitome of middlemen. In slightly more than 10 years, these platforms have managed to etch a permanent place for themselves in the gap that exists between investors and those that would manage their money.

From the beginning, however, there has been a question mark not only over whether the cut these middlemen reserve for themselves is justified, but also over whether it would be their ultimate undoing.

When the oft-quoted Cerulli Report predicted in early 2000 that, after a tumultuous couple of years, the number of master trust and wrap providers in Australia would be whittled down to just five, it prompted a period of collective navel gazing which continues to this day.

Cerulli’s vision for the consolidation of Australia’s investment platform market was founded in no uncertain terms on a deeply held belief that the sector was on the verge of a major price war. The war according to Cerulli, would leave only those with the capacity to substantially reduce cost and fee structures with any hope of survival.

Two years on since the release of the report, however, and with only some evidence of a mood of consolidation, a wide-scale purging of master trust and wrap providers is yet to materialise in this country.

According to Look Research, there are still 144 master trust and wrap accounts being offered by some 70 different groups across the superannuation and non-superannuation investment sectors in Australia.

To be fair to Cerulli, its predictions of a local master trust landscape made up of only a handful of dominant players was made more in reference to underlying platform providers than actual master trust and wrap promoters.

From this perspective at least, the prophecies of Cerulli do hold some weight. Of the 144 different master trusts and wraps in the market, 78 are badged white-label products, with major groups such as BT and Asgard providing the platform on which many others base their master trust or wrap.

At around the same time as the release of Cerulli’s landmark predictions, Look Research reported that the entry fees in the master trust sector ranged from zero to five per cent, while ongoing fees varied from 0.6 per cent to 2.5 per cent of the value of a portfolio.

Some two year’s later, the most recent research from Look indicates that the fees charged by master trusts remain roughly within those same ranges, suggesting perhaps that the much anticipated Cerulli price war is yet to materialise.

According to Look, the initial fees charged by superannuation master trusts and wraps now range from zero to 6.15 per cent, averaging 2.72 per cent, while the initial fees of non-super products range from zero to 5.5 per cent, averaging at 2.47 per cent.

The ongoing fees of superannuation master trusts and wraps based on a $100,000 account range from 0.5 to 2.24 per cent, averaging 1.43 per cent, while the ongoing charges of non-super offerings range from zero to 2.4 per cent, averaging at 1.33 per cent.

The apparent failure of the master trust sector as a whole to reduce the upper range of fees over the past two years could be explained by the expanding array of new products and services, which are increasingly being offered through most investment platforms.

However, there is nothing obvious in the figures supplied by Look to suggest that the charges levied by master trust and wrap providers are intrinsically linked to the range of services they offer.

The apparent inability of the master trusts and wraps sector as a whole to make significant progress on fees, prompts the question of who is benefiting most from the rapid expansion of these products — particularly given the often complicated array of commissions they pay to advisers.

According to Look, the initial commission paid to advisers by master trust and wrap providers ranges from zero to 5.5 per cent, averaging at 2.53 per cent for superannuation product providers and 2.29 per cent for non-super providers.

The ongoing commissions (based on a $100,000 portfolio) paid to advisers, according to Look, range from zero to two per cent, averaging 0.48 per cent for superannuation master trust and wraps and 0.34 per cent for non-super products.

Perhaps it is with these very commissions in mind that people are now questioning the motivation of advisers in recommending master trusts and wraps.

A recently released report, titledHypercompetition Part 2—Survivor:Outwit, Outplay, Outlast,claimed while such platforms have done much for financial advisers’ own businesses, few benefits have in fact been passed on to clients.

The report, written by Credit Suisse Asset Management senior executives Brian Thomas and Clayton Coplestone, concluded that the financial planning industry in Australia had become fixated on administration platforms, despite the fact that they had failed to reduce their fees in any significant way for 10 years.

The data supplied by Look goes one step further, hinting perhaps that advisers are not only recommending master trusts despite their inability to reduce fees, but that advisers themselves are a factor in the level of fees levied on clients.

According to the data, superannuation master trusts that charge an initial fee of between one and four per cent pay an initial commission to advisers of, on average, about 1.75 per cent.

However, as the initial fee goes up, so too do the initial commissions paid to advisers — those superannuation master trusts that charge a fee of between four and five per cent pay, on average, an initial commission of four per cent, while those that levy an initial charge of more than five per cent pay advisers a commission of about 5.18 per cent on average. It is a similar story for non-superannuation master trusts.

From there, it is not too much of a stretch to suggest that some fees charged by master trusts are designed to cover the commissions they want to pay to advisers.

To the credit of advisers, there is nothing in the data from Look to suggest that the flow of money into master trusts is necessarily concentrated in those master trusts and wraps that offer the highest commissions, initial or otherwise.

And it is the flow of money that the master trust and wrap game is all about. If the Cerulli Reportdid get one thing absolutely spot on, it was that master trusts and wraps would very quickly become the dominant form of investment platform for retail investors.

At the time the report was written, some 37 per cent of retail investment were being made through master trusts and wraps. Today, that figure is probably closer to 65 per cent and is showing no signs of abating, fees or no fees.