Industry debates the future of master trusts

MM: Do master trusts meet theneeds of financial planners andwhere do they fall short?

Richard Navakas(RN):It standardises the way in which we deal with clients. It enables us to be proactive in reweighing their portfolios.

Andrew Harrison(AH):I suppose our broad comment would be yes, master trusts are great from a financial planner’s perspective, given the efficiencies and the offers that are available to a majority of investors. But then there are those who may want something a little bit different to what’s currently on offer.

MM: Do they fall short for a particular type of client or are theylooking for something beyondthe master trust proposition?

RN:There is the pressure on fees, and I think given that fee for service is just gaining momentum, clients would like to come up with a fixed cost as opposed to some of the tiering that’s involved at present.

Given the way Australians are re-educating themselves on all things financial, they’re looking for some things that might fall outside of a typical master trust.

Matt Lawler(ML):It’s interesting how master trusts actually evolved. The issue that they solved was a very basic one, which was people were signing a whole stack of application forms and they couldn’t actually get a consolidated report and present that in any meaningful way to the client. So in terms of a master trust being defined as that, it’s a little bit tired today.

I also think the way advisers get paid has shifted, which also puts pressure on how master trusts structure themselves and if the shift is from getting paid for placement to getting paid on an ongoing basis, then the master trust very clearly has to help the adviser add value on an ongoing basis, and that’s not just consolidated reporting.

Chris Kelaher(CK):I accept that they move to consolidate things and provide a convenient view of all of a client’s investments.

I think the other thing that hasn’t been mentioned is that they provide access to wholesale investment fees and management from that perspective. So it is to some extent providing access to historically unavailable sorts of investments and pricing on investments.

MM: Has the move to usingplatforms made financial planners lazy?

RN:I don’t think they make you lazy. I think it frees you up to do more. Issues that were time consuming, things that were not cost effective for clients to have you do, are now cost effective. You can do lots more.

AH:I don’t think we’ve got lazy. I think we still spend as much time as we ever did on investment theory and making sure that the clients are educated and are able to make an informed decision.

ML:Can I change the phrase from ‘lazy’ to ‘released capacity’ because released capacity can be used in a whole range of different ways. Playing more golf is one. Released capacity means they can concentrate on the things that add value and a lot of that stuff is just spending more time in front of the client understanding what it is they’re trying to do.

The other thing they can concentrate on is revenue generating efforts, so the time released means more time spent on marketing and acquiring new clients.

MM: How do financial planners select master trusts? Is itbased on the cheapest MER?

RN:Definitely not. I think it depends on the business model that the financial planning practice is using.

Colin Woods(CW):As far as investment choice is concerned and using Australian equities as an example, there are over 60 fund managers. And as far as who you deal with, obviously you’re going to want to deal with those platforms that have the distribution capacity, which again comes back to the major banks and maybe the likes of AMP.

ML:An adviser will make a choice about the platform they use that suits their business model. So whether the platform is chosen for them or not, the real issue is, does having the one platform mean a lot of great client outcomes? Many advisers in the past have had three or four different master trusts, and their client experience is all over the shop.

Dominic McCormick(DM):In terms of investment choice, I don’t think it’s a matter of too much choice. It’s whether advisers and investors have the right choice. I think there has been a reluctance to put on some of the boutiques and some of the alternatives, and it doesn’t really make sense that investors are not getting access to a range of those investments.

ML:That’s a very difficult debate, because if you’ve got 300 investment options, the debate is always about having 310, and if you’ve got 310, it’s always about having 312.

DM:I am not just talking about the alternatives, I’m talking about some of the boutiques. I mean, the so called successful managers of today typically started off as boutiques or weren’t well-known and if they were precluded from investors in those early years, which is when they typically get their best outperformance, then I think it is an issue for advisers.

ML:Out of the 300 investment options we have on Flexiplan, about 150 of them have $500,000 or less. However, you have to have the choice, but in actual fact, no one uses the choice, they go mainstream.

DM:It brings up whether you move to more multiple portfolios and fund-of-funds, which is a whole separate issue. And who are the gatekeepers that are directing what clients’ portfolios look like, or do we leave it totally up to the planners?

MM: We’re talking about getting products onto a list of amaster trust, is this an issue youhave had?

CK:Yes, that’s our experience as well. On one of our products we have 100 funds, and it’s really the old 80/20 rule — there are vast proportions of them that aren’t used or have very low balances and I don’t think they run to anything more than, say, $200,000 to $300,000. As technology develops, it really isn’t that much more marginally expensive to put more managers on.

RN:It’s just a bit of an additional cost if they are not being used heavily and that’s one of the Hillross issues — to make sure that the dealer group is going to use the product to a reasonable level for it to be on that recommended list.

CK:Research is becoming commoditised very much these days. You can buy it off the shelf and what you pay depends on how good it is.

RN:It falls back on the dealer anyway, doesn’t it? At the end of the day, it’s a dealer’s responsibility, so it’s an added cost to the dealer as opposed to the master fund provider.

ML:It’s a cost to the adviser as well. When you view the adviser as a technician, they love the fact that they get 3,000 investment options because it makes them happy. As a business person, choice is the enemy. It’s that juggle you’ve got to make.

MM: Is there a flow-on effectthen into the fees that arecharged to planners and ontoclients based on shelf fees?

AH:From our perspective we don’t charge that, but I think at the end of the day, perhaps we are moving towards that area as our menus get larger.

ML:We play both ways and have investment options on other master trusts and we pay the shelf space fee to appear on those.

In terms of being a platform provider where there are hundreds of managers that have options on our platforms, we haven’t charged the shelf space fee. We are waiting to see the dust settle a little bit on all the brouhaha that started a number of months back.

MM: As product manufacturers, how do you see paying thefees and why do you pay them?Do you see them as a necessity?

Stephen Karrasch(SK):From a Rothschild perspective, we would support a sharing of the economies of scale, as quality and depth of the platform relationship grows.

MM: What are some of thethreats facing platforms? Andwhat about consolidation?Cerulli predicted a few yearsago there would be somethinglike five master trust providersin Australia.

SK:We have 115 relationships in the multi-manager marketplace. But the underlying platforms are consolidated to around 40. The top 12 dominate 80 per cent of net funds flow in the industry — so let’s be clear, there is massive consolidation going on in the platform market and that’s going to increase as the banks start to bring in independent distribution.

We don’t think we will get to the five that Cerulli indicated within its time frame, but clearly the move is in that direction.

CK:I think you are seeing it at the smaller level. I am not sure that it’s going to move any lower than 20 or 30 providers.

ML:I think maybe not five, but we are going to see massive consolidation over the next couple of years. I think the Cerulli prediction has been prolonged for two reasons. One is that investment performance has been very, very good, which means providers can still charge 2.5 per cent and be comfortable with it. That’s absolutely under pressure now with more and more scrutiny.

The other thing is that there has been a lot of equity plays and that will prolong something that’s a little bit shaky and may not stand up.

MM: What is the future outlook for platforms/mastertrusts, as well as some of thethreats and opportunities?

CK:Being a master trust operator, I think the future looks very strong for us at the moment. I think potentially the wrap product in the non-super area may be a challenge.

ML:The master trust will evolve into the advice platform, which will be the whole experience that an adviser has with a client and that will inevitably involve more than investments. Choosing a platform that can deliver is going to be critical and I think margin pressure and the ability to spend in technology is going to be what an advice platform has to cope with.

SK:I think we will see some further vertical integration into portfolio construction and manager selection, as the platforms start to look for new grounds for competitive advantage, and that will be moving more into the traditional manufacturers’ part of the value curve.

The downside is definitely this issue of value for fee and potential of new competition coming in and providing some alternative solution yet to be defined.

AH:I think master funds and the like will continue to improve client outcomes.

From a financial planning business perspective, I think that’s going to help maximise the future business value of your practice, if there is that recurring income that a master trust is capable of providing.

In terms of future threats, perhaps some of those industry super funds with substantial funds under management are now looking to market directly to retail clients.

RN:I think the future’s exceptionally bright for master trusts from our practice’s perspective.

I think part of the downside again is the fee pressure. The master trust back-office has to have better linkages into the wholesale fund providers to try and speed up the transactional side of things.

DM:One trend I am clearly seeing is there is more use of fund-of-funds and model portfolios within master trusts and I think that is actually a threat for master trusts themselves. People then refocus on ‘what am I using a master trust for?’. If the original premise is consolidation across a large range of investments and they end up in one or two funds, the whole issue becomes, ‘wouldn’t I be better off in just one product being offered by an MLC or one of the multi-manager providers?’.