Life under the new master trust regime

In light of changing legislation and new policies from regulators, the industry is re-evolving in the areas of master trust and wrap accounts. Richard Shermon explains how for portfolio administrators, less regulation has equaled greater product innovation.

When it comes to financial regulations, the more things change...the more they change. It has almost become a cliche to talk about the rapid change in our industry. Yet often we focus on the effect of changing regulation on our businesses, instead of seeing change for what it is: an opportunity to innovate.

Recent changes in the asset administration industry, namely to master trusts and wrap accounts, promise to provide such opportunities.

The problem is that it is impossible to teach a dog to be a cat, and while that sounds strange there are good reasons for that statement.

Previously, while master trusts and wrap accounts provided essentially the same service, with the exception of a trustee for wrap accounts, the regulatory requirements couldn't have been more different.

Corporations Law and Australian Securities and Investments Commission (ASIC) policy for master trusts was highly prescriptive, basically treating them as unit trusts with different spots, while a far less stringent, self-regulatory regime existed for wrap accounts.

The logical solution was to let the services be treated as a service and not as a product.

New ASIC policy allows providers to operate what it calls investor directed portfolio services (IDPS), creating a level playing field for portfolio administration services.

Essentially, the new policy recognises that administration services are just that, services, and that treating them as products is restrictive and regressive.

This level playing field then provides great opportunities for providers to overhaul their services for the benefit of advisers and their clients, with the first area to consider being lower compliance costs.

Master trusts operate under a single responsible entity structure which is the same regime that governs most unit trusts. As such they must maintain a trust deed, undergo annual external audits and maintain 50 per cent external representation on their boards or establish a compliance committee.

Investor directed portfolio services have significantly fewer compliance requirements which results in the lower compliance costs mentioned.

However some service providers will dress up their master trusts in IDPS disguises, seeking relief from ASIC to operate under a quasi-IDPS arrangement. While these providers will be able to expand their existing services to bring IDPS-style offers to the market, they won't benefit from reduced compliance costs. This will adversely affect their competitiveness and attractiveness to investors.

In the short term, lower IDPS compliance costs will be offset by the costs involved in establishing new IDPS schemes and the transfer of master trust investors to the new schemes. In the medium to long term, however, the market will apply pressure on service providers to pass these savings on to members.

With fewer restrictions on the structure of portfolio services, IDPS makes it easier to create innovative, hybrid style services that meet specific client needs.

These services marry an investor directed portfolio service with facilities tailored-made for trustees of self managed superannuation funds such as trust deed services, fund establishment, lodgment of tax returns and business activity statements and trust audits.

I have no doubt that we will see an increasing number of these hybrid products, creating a new breed of targeted, client-focused services. The upshot of this is a new round of expanded choice in the type and nature of investments available to investors.

Trustees of master trusts have a duty of care to investors to carefully select the managed investments and direct shares they offer, requiring extensive research and regular reviews of the suitability of underlying investments. This is, and will continue to be, appropriate for superannuation master trusts, but it has placed undue restrictions on non-superannuation investments.

IDPS expands investor choice as they can include wholesale or retail funds, or any other investments available on the market, be they equities, derivatives or foreign investments.

The only limitation is the ability of the service to efficiently administer such investments at a cost acceptable to investors.

We'll also see clients and their advisers demanding a greater role in shaping investment menus and services. Less trustee restrictions allow for greater buy-in by advisers and service providers will have to tailor their investment lists and services to the demands of adviser groups, or risk losing distribution.

The ASIC policy on IDPS also requires adequate disclosure in offer documents, but hasn't set about being overly prescriptive and hopefully, this will ring the death-knell for dry-as-dust master trust prospectuses.

Providers who don't seize this opportunity and continue to produce offer documents that don't succinctly explain the benefits of the service will suffer in comparison to brochures that are informative and provide marketing support to advisers.

By creating a single category for non-superannuation portfolio administration services, investors will no longer be caught up in the competing claims of the master trust and wrap account categories.

This makes it easier for clients to compare the features and benefits of equivalent services. All of this means a less confused, and better informed, client.

But does this spell the death of the master trust? Hardly.

For many years, to paraphrase Mark Twain, news of the death of the master trust has been greatly exaggerated. Master trusts will continue to exist and prosper for superannuation investments where trustee protection provides a tangible client benefit.

But for non-superannuation money, IDPS represents a well-overdue springboard to a more customer-focused industry.

<I>Richard Shermon is marketing and retail products general manager for AXA Australia.