Will master trusts be wrapped up?

Master trusts are set to become more wrap-like in the future, as product providers look to offer more product add-ons to their basic consolidated reporting model.

It is a development that reflects a blurring of the boundaries between master trusts and wrap products, and the launching of wrap accounts as the product of the future.

“Master trusts will need to become more like wraps because wraps are the answer to financial advisers’ needs. They fill the gap,” AM Corp Adviser Services group general manager Graham Davison says.

While master trusts were the first product in the revolution, wrap accounts evolved like a second generation of master trust — they have all the features of a master trust and more.

BT head of product development Brian Bissaker says the major difference between master trusts and wrap accounts is the flexibility of movement.

This refers to the ease of moving from one service provider to another. In the case of master trusts, this action incurs capital gains implications for clients.

Despite this, Bissaker says BT is seeing a fair bit of movement from master trusts into wrap account structures.

“It is ultimately a value judgement between the client and the adviser,” he says.

Bissaker says wrap accounts are the product of the future because of the functionality advantages they have over master trusts, as well as flexibility in fee payments and transparency.

“It is an adviser-based market with a very small number of people coming directly into master trusts and wrap accounts.

“They [clients] need an adviser to understand the value proposition,” he says.

To date, there is a mix of master trusts and wrap accounts on offer in the market, with financial planners selecting what platforms they wish to employ.

However, it is not clear where wrap accounts pick up business and where master trusts lose it.

“The two products do compete, but it is doubtful where one stops and the other one picks up,” Davison says.

This has perhaps made it difficult for planners and dealer groups to select which products are most appropriate for them, and in turn what to offer their clients.

According to Hillross Financial Services financial planner Richard Nevarkas, there are costing issues to be considered when offering both master trusts and wrap account structures to clients.

He says ultimately planners are looking for useability and functionality.

“We are looking for a platform that is sustainable, and that we are comfortable with. We don’t want three to four platforms because it means our costs will go up,” Nevarkas says.

“I tend to think we will stick to a master trust model. Master trusts are more up and down in terms of what they do.”

While Bissaker says master trusts will not evolve to become wrap accounts (especially given the custodial nature of wraps), he says we will see wrap platforms develop alongside master trust structures.

Bissaker says concerns over the cost of providing a range of platforms could be short-sighted given the huge growth potential of wrap accounts.

In the case of BT, it has $5.3 billion funds under administration, with an average quarterly funds under administration growth rate of 20 per cent.

He says it has been BT’s experience that some planners may initially place a few clients in a wrap account just to test the administration capability.

According to Sealcorp distribution director Dan Powell, advisers do not make the distinction between whether they use a master trust or a wrap account.

He says while the key value proposition for master trust and wrap account providers is to sell products, financial planners want to sell the solutions.

“It’s really about getting across a key value proposition — and saying we offer a key service,” Powell says.

However, concern over fee variation ranging from 15 to 160 basis points has drawn attention to the issue of exactly who benefits most from these products.

“It is not about the consumers ever. We can say that because we care about the client. It’s about how much money they can sell the practice for,” Davison says.

AM Corp is concentrating on its product design, already servicing some 3,300 advisers in its online Bureau service.

“We have studied the competitive environment, and we do lose money to wraps on issues other than product design,” says Davison.

Online wills are set to be the latest addition to the Bureau service because AM Corp says wills are an important aspect of the financial planner’s business.

“The advisory industry is going to grow, and service is the thing that will determine who will survive,” Davison says.