Master trusts must target new opportunities

Iwouldlike to continue the theme from my last article about crossroads and vested interests, by discussing ‘me toos’, commoditisation, and fees. Add to this, a focus on the unbundling of the unit trust structure.

In many ways, our industry reflects our society. With issues like an ageing population, globalisation (in both trade and people), the taxation base and environmental issues requiring brave and noble solutions, it seems our leaders prefer to focus on base populist issues, protecting the status quo, and saying one thing and doing another. So too in our industry!

We have an industry more concerned with the status quo, and following, almost lemming like, the latest trend. One bank got into wealth creation, so they all had to. (Someone might explain to me what wealth creation means — does it mean wealth creation for the client, or someone else?) One had a discount broking business — they all had to. Fund managers are no different. One bought distribution, so most of the others did also. But what about wraps and master trusts?

Last year there were over 100 wraps and master trusts in the marketplace. (That’s only counting the retail discretionary ones, and regarding superannuation and allocated pension divisions as only one product.) Today I’ve lost count, and I know of more that are being developed.

However, what’s of more concern is the number that are being built, not just rebadged. In the recent Technology Report I did forMoney Management(July 12), I found 18 platform providers, that is, 18 providers who had their own platform that they were willing to badge.

Yet there are still banks, fund mangers and life companies out there building new platforms. Why? The market is already overcrowded, the margins are coming down and new and more efficient solutions are about to appear.

Further, Cerulli Associates predicted over a year ago that by 2004, there would be only four to five platforms in Australia of any significance and that fees (annual administration costs) would have halved. So why are they still being built?

One reason could be that they think this is the way to get distribution. Another reason could be that they couldn’t find ways to lift their investment performance, so they think this is a way to stay in the game. Or, they are so bereft of new ideas that they have to adopt a ‘me too’ attitude. Wraps and master trusts are quickly becoming commodities that will live or die based on the quality of their technology and administration, both of which are in short supply in this industry.

When a product becomes a commodity there is only one of two ways it can compete — price or features. Both require size, deep products and the intelligent and innovative use of technology. (No wonder Cerulli predicts that there will be only four to five major players!)

My prediction is that the wraps and master trusts, as we know them today, will become just part of the technology infrastructure, just a part of the backbone of the industry. The more astute providers already recognise this and are re-engineering their product offering so that they can transform it.

At one end, we’ll have a comprehensive offering that provides the adviser with a complete desktop solution, and at the other end, modularised offerings that allow dealers and advisers to build their own solutions.

This is where I focus on the unbundling of the unit trust structure. The technology now exists to make the unit trust structure redundant. In the US there is about US$300 billion in what are called separate accounts and there are at least three providers of them in Australia — Macquarie Bank, Citicorp and JB Were.

A separate account is where an adviser selects an investment manager, say Credit Suisse, to invest the money, but the money is held by a custodian, not Credit Suisse. Credit Suisse instructs the custodian how to invest the money, but the investments are made in the name of the client. The monies are not put into a unit trust or any other interposed structure. Therefore, if for some reason, Credit Suisse was no longer to be the investment manger, the custodian is advised and the investments are retained, i.e. not cashed.

If any stockbrokers are reading this article, they’ll say, that’s what we have been doing for years. In many ways that’s true, just what the trustee companies have been saying about wraps.

Unfortunately, these are two examples of offerings that the providers got so close to, and so familiar with (in their own silos), they didn’t see the wider opportunities. To be fair though, technology has helped with the wider application. Another way to look at it is the bringing of the mandate and implemented consulting to the retail market.

This way of investing has many advantages. Firstly, you get the benefits of collective investment without the negatives of the unit trust structure.

Secondly, you get the benefits of the professional manager without the negatives of the unit trust structure.

Thirdly, you are investing in a universal structure, one that is common around the world. There are three other advantages also, being: tax, costs and performance.

Tax, especially capital gains tax. Being in a unit trust structure, you can be penalised both while in the trust and when exiting.

Costs, especially the buy/sell costs. There should be no differential, as you should incur only your own costs, unless there is a termination penalty to deter hot money.

Performance, because of cash slippage. Managers normally keep some cash aside, as they cannot predict inflows and outflows.

The separate account concept is a real challenge for fund mangers and a real opportunity for wraps and master trusts. The more myopic fund manager will see it as a threat. It will cut into their margins, make monies they provide investment advice on less sticky and make their legacy systems more archaic.

The opportunity for wraps and master trusts is to become the custodian and the aggregator, but not all will be up to those roles. It is likely that we will see as much resistance to this as we did to master trusts.

Which gets me to fees. As I said in my last article, there are a lot of inefficiencies in this industry, possibly to the tune of 75 to 100 basis points. This means we could save this for our clients and still retain our margins. But this won’t happen if everyone tries to do everything that everyone else is doing.

Almost every day there is an article in the media about fees. Some of it is ill-informed, but we don’t help ourselves with our inefficiencies and obfuscation. Neither does it help when we have no common way of expressing costs. Either we get our act together, or it will be got together for us. For the time being the choice is ours — but for how long?