Wrap it up

Financial advisers like to push investment platforms but customers should investigate the benefits first, writes Annette Sampson.

Financial advisers like to push investment platforms but customers should investigate the benefits first, writes Annette Sampson.

They're called platforms and, if you believe the hype, they're the crowd-pleasers of the investment world. Master funds, wrap accounts and the newer breeds of separately and individually managed accounts are all administrative structures designed to hold your investments.

Research group Investment Trends says platforms have grown dramatically in the past decade. From a standing start in the early 1990s, Investment Trends says 82 per cent of new money invested by financial planners' clients last year went in via platforms. Many investors are finding that if they want to invest through a financial planner, it's almost impossible not to have a platform.

There are many reasons to love platforms. The big institutional fund managers think they're the bees knees because they have allowed them to shift from being money managers to distributors of financial products. Instead of relying solely on their investment-management skills, the big institutions have developed products that allow them to ticket clip on every dollar invested through the product - whether it's a fund of their own or one of their competitors'.

Smaller fund managers like them, too. Instead of spending squillions setting up a retail business, boutique fund managers can market their funds through adminstrative platforms and have the platform provider do most of the administrative work. They might have to pay a fee to the provider for the privilege but it allows them to reach investors they might otherwise have missed. And if fund managers are keen on platforms, financial planners are postively gaga over them.

CONVENIENCE MATTERS

Platforms save advisers work. In the old days, if you went to an adviser and invested in 10 managed funds, he or she would have to keep track of each holding. With a platform, technology takes care of that and the planner can call up your total portfolio with a few keystrokes.

Even more importantly, platforms have allowed planners to restructure their remuneration.

Instead of taking upfront commissions from managed funds - which is how it was done previously - planners are paid by the platforms they use. Upfront fees still may be incurred but ongoing asset-based fee arrangements are more commonly used. Planners have swapped remuneration that was erratic, increasingly on the nose with clients and out of their control for a steady income stream that increases the value of their businesses and allows them to set their own fee levels within the platform structure.

For investors, the main drawcard is that platforms provide a structure to hold all your investments. This means all the paperwork is in one place and you receive consolidated reports. No more scrabbling around to find 50 pieces of paper come tax time. That can save money.

By providing access to wholesale investment funds, platforms also provide access to boutique and other funds that investors may not have been able to gain themselves.

These funds also charge lower fees than retail funds, which should, in theory at least, make up for the added cost of the wrap itself.

WHO OWNS WHAT

The first thing is to know what sort of platform you're being sold.

Brett Marsh, the chief executive of managed accounts with Direct Portfolio Services, says one of the main considerations is how the platform is structured. Standard managed funds are unit trusts. This means they are a legal entity in their own right and have a trustee who holds the investments. Master funds have the same structure but allow you to invest in a menu of sub funds within the trust.

Wraps and the managed accounts differ - you retain beneficial ownership of your investments. The platform is simply an administrative account wrapped around those investments.

Marsh says this can make a big difference for tax purposes. He says when you invest in a unit trust, you often take on a share of the existing capital gains tax liability of the fund. With an account-based product you own the underlying investments, so your capital-gains-tax cost-base is what you paid for them. (Though, obviously, if you invest in managed funds within the platform, the tax treatment within those funds remains the same.)

Jennifer McDermott is manager of adminstrative services at Centric Wealth and says beneficial ownership also means you can transfer assets into or out of account-based services without triggering a-capital-gains-tax liability. In contrast, if you invest in a master trust, you will be liable for capital gains tax on your units if you want to get out. Most account-based services allow such in-specie transfers but it's worth checking, as selling the investments to pay you out in cash may also trigger capital gains tax liability.

It's worth mentioning, however, that this distinction doesn't apply to superannuation investments - super funds are legally required to be structured as trusts. BT head of wrap solutions, Chris Freeman, says super wraps can't provide the same tax advantages. To get those benefits, you need your own self-managed super fund, which in turn can invest in a managed account.

WHICH PRODUCTS?

In its recent update on wraps and master trusts, consumer group Choice, said there's a difference between open access and in-house products. With the former, you can take your account with you if you want to change advisers. But with in-house products you may be forced to close the account.

Of the account-based products, wraps are by far the most popular. Investment Trends says just 18 per cent of planners used separately managed accounts last year and less than 3 per cent of planners' inflows were directed into these or individually managed accounts.

Freeman says such accounts are popular in the US but there is confusion here about what they are. Wraps and managed accounts have overlapping similarities but the main difference is the degree of customisation.

Wraps are a mainstream product with a wide range of managed funds and direct investments. Freeman says BT's Investment Wrap - the biggest on the market - provides access to more than 700 managed funds from more than 90 fund managers, every ASX-listed share, term deposits, a cash account, integrated margin lending and life insurance. He says BT envisages it as a one-stop shop that captures total assets and liabilities.

The managed accounts typically focus more on direct shares - though they are increasingly giving access to other investment classes as well.

Marsh says separately managed accounts are more like managed funds without the trust structure. Your money is still pooled with that of other investors to gain benefits of scale and a fund manager still decides what assets to buy and sell. But you own the assets directly. So if you look up your portfolio, you can see how many BHP or Woolworths shares you own, what they're worth and what transactions the fund manager has made on your behalf.

Marsh says the investment costs with such accounts can be cheaper because they have taken out the trust structure and the need for unitisation and daily unit pricing. "Our highest investment management fee is 0.55 per cent because we've removed a whole layer of costs," he says.

Marsh says the accounts are regulated as managed-investment schemes by the Australian Securities and Investments Commission, which means they have the same disclosure and prudential requirements as a managed fund. You receive a product disclosure statement setting out all the essential information, including fees and charges. A custodian is generally appointed to hold your investments and your account is audited.

Marsh says they can also provide a degree of customisation. Direct Portfolio, for example, allows clients who transfer stock into its accounts to put a "lock" on some or all of those stocks if they don't want the fund manager to sell them. If you transfer stock in, you must also provide a tax history so that, if stocks are sold, the fund manager can sell the lots that will provide the best after-tax outcome.

He says Direct Portfolio also has an administrative-only option where clients can buy and sell shares themselves without having to worry about all the paperwork. "A fair number of clients use this in conjunction with a professionally managed mandate," he says.

TAILORED OPTION

Customisation is where individually managed accounts come into their own. McDermott says these are structured as a managed discretionary account service, which means they are managed by a professional investment team, to parameters you and your adviser can set. They typically have a range of model portfolios. For example, within Australian shares, they might have growth, income and ethical portfolios. McDermott says investors use these as their starting point and can add or subtract according to their needs.

For example, you may want to hold on to certain stocks for tax or emotional reasons and can ask for these not to be sold. Harley Dalton, the managing director of independent provider Dalton Nicol Reid,says there are also instances where clients cannot hold certain stocks for professional reasons, or are prohibited from trading during certain periods because they are directors of a company.

Dalton says his company recently introduced an ethical mandate because a large number of clients had been customising portfolios not to invest in industries such as gambling and tobacco.

"The tailoring is mostly around financial planning and tax issues rather than choosing investments," McDermott says. "The portfolio manager has total discretion within the constraints of the portfolio."

Dalton says the securities watchdog deems these accounts to be a financial service rather than a financial product.

He says providers must hold a managed discretionary account operator's licence and send out quarterly reports that include up-to-date valuations, income and expenses including fees and transaction and tax histories. Every 13 months the investment program must be reviewed to ensure it is still appropriate for your needs. McDermott says advisers have to give a statement of advice that the portfolio is relevant to the client's needs.

Dalton says they must operate to a mandate and so differ from the old discretionary accounts provided by brokers. The fund manager doesn't have total discretion to do whatever he likes. He says the account agreement sets out how your money will be managed and can forbid, for example, practices such as stock lending.

"There is actually greater visibility than with a managed fund as you know what stocks you hold and can see what is going on," he says.

These accounts tend to have higher minimum account balances than wraps or the separately managed products. This will vary between providers but as a guide, Dalton says, they work best for accounts of $1 million or more. Marsh says Direct Portfolio requires a minimum account of $25,000 for its separate accounts, though this is on the low side. By contrast, master funds and wraps have lower minimum account balances.

FEES, FEES, FEES

Whichever option you choose, says Kevin Bailey, the managing director of The Money Managers, you will incur three levels of costs. You should understand what you're paying for - advice, administration and investment management - and what the total cost will be.

He says some retail products, particularly master trusts and the pared-back or "baby wraps", will bundle these costs into one fee and pay the adviser a commission. But Freeman of BT says full wrap services are more transparent. "With our product you can see every quarter how much you're being charged for advice and administration in dollar terms because the money is taken out of your cash working account," he says. "The investment fee is disclosed but comes out of the investment returns."

"One thing about wraps is that they're very ugly because the consumer sees exactly what they're paying in dollars and cents," Bailey says. "A baby wrap is more like a managed fund. You don't see as much."

Bailey says while wraps claim to charge wholesale investment management fees, "a lot are not institutional level fees, more a mezzanine level". He says these fees will vary depending on the funds used, but 0.5 to 0.6 per cent isn't a bad guide to what you should be paying for an actively managed equity fund through a wrap. He says a reasonable administration cost is about 0.5 per cent and all up you should be paying 1 to 2 per cent "depending on the size of your account and what sort of funds management and advisory services you are getting".

Many advisers will have their own wrap account but Bailey says these are often "white-label" wraps from big institutions. His firm has "badged" the BT wrap and its version is in turn used by other financial planners. "We negotiated a fee with BT and co-operated with them on the design parameters," he says.

Freeman says BT gives a wholesale price to advisory firms wanting to badge its wrap and they set the prices charged to their clients. Typically, they take a margin on the administration and "dial up" their fees in consultation with the client. "We don't get involved in whether they receive fees or commisions," he says. "We collect their remuneration but they have total flexibility over how they are paid."

In its review, Choice warned some platform providers pay "over-ride" commissions to planning groups for the number of investors they bring to the platform, which can constitute a conflict of interest. Bailey says dealer groups can also receive volume rebates to help with their own adminstrative costs.

With the managed accounts, McDermott says, advice is more often billed separately. Centric has its own individual account business but most planners use an external provider if such an account is appropriate for their client. Dalton says his firm's fees as are about 1 per cent, though a sliding scale applies and this cost does not include advice.

PORTABILITY

McDermott says portability is also an issue with these platforms. Theoretically, as you own the underlying investments, you can take them with you if you want to switch to a new adviser or a new platform. But if you change advisers, McDermott says, chances are your new adviser will use a different platform. So you need to understand to what degree you may be locked in.

She says Centric has a preferred platform but advisers are not locked into it. "There are circumstances where it's not right. Particularly if a client is already on a different platform, you wouldn't move them unless there was a benefit."

Bailey says investors should check that they can transfer investments out without incurring capital gains tax or exit penalties if they want to leave.

He says investors should also be comfortable with the administrative capabilities of their platform provider and the investment options. One less desirable aspect of wraps, he says, is the growing trend to charge fund managers to be listed on the menu. "You don't know if they're the best funds or just used because they've paid to be there. With baby wraps, they can charge more because the shelf space is more limited."

These issues are less relevant to the managed accountss, though the expertise of the investment managers is much more important.

As the market develops, Freeman says the lines between different platforms are blurring. Some financial planners already use the BT wrap as a framework, as the administration and share access is already provided. "There's definitely more interest being shown in direct equities and we're embarking on improving our processes, which will lead to [these managed accounts] on the wrap."

QUESTIONS TO ASK BEFORE SIGNING UP TO A PLATFORM

* What are the fees? How much will I be paying for advice? Investment management? Administration? Will I receive clear statements of exactly how much I'm paying for each of these services?

* Who will "own" my investments? Will they be in my name or held in trust? If I am the beneficial owner, who will safeguard my investments? Will they be held by a custodian? If so, who?

* What happens if I decide to leave my adviser? Can I use this platform with another adviser?

* What happens if I decide to leave this platform? Will I incur exit penalties or capital gains tax? How long will it take to transfer my assets out? Are there assets that can't be transferred to me direct - such as some wholesale funds?

* How many platforms do you recommend and why are you recommending this one? Do you or your company receive an incentive for promoting this platform?

* What can I invest in through this platform? Does it charge fund managers shelf space to be included? Does it push its "in-house" products?

* How is this platform regulated? Where can I go if I have a complaint?

* Who manages my investments? What is their track record and expertise?

* If I'm using an individually managed account, what happens if they don't follow my instructions?

* How good is the administration system? Can I get up-to-date information online?

* How much control do I have over my investments? Does the agreement or product prohibit practices such as stock lending?

LESSONS LEARNT THE HARD WAY

Wrap accounts are supposed to make investing simpler and more transparent. But as retiree David Bates discovered, they're only as good as the people using them.

Bates was self-employed and had his own self-managed super fund. But when he retired he went to see a financial planner with a major bank who put him into the firm's wrap account. That was in November 2006. By mid 2007, Bates was less than impressed. Despite being profiled by the adviser and told he was risk averse, Bates's investments were going backwards. It took almost three months to add his funds' distributions to his account and he says the adviser had little understanding of "decumulation" as opposed to accumulating assets.

In November, he decided to pull his money out. It took about a month to get the bulk of his money back but $60,000 of overseas investments remained in the account. That's when things started to go seriously awry.

Bates's adviser left the firm and in the Christmas rush he found it impossible to get assistance. In mid January, he says, he looked at his account online and found that the $60,000 he was waiting to be redeemed had automatically been reallocated according to his original asset weightings. It turned out his adviser "had ticked the box for automatic asset allocations, which meant the account was automatically rebalanced every quarter".

No one had thought to turn this option off when the redemption process had started. Bates says a friend who had switched between investment options also lost money through automatic rebalancing.

In trying to sort his account out, Bates found a $7000 discrepancy between what he believed he had lost and the wrap account's estimation. Contrary to expectations there was no clear audit trail of transactions and he had to take their word for it.

"I feel their system is about 50 years out of date," he says.

Bates says he was also unhappy with the fees he was being charged. "I was paying 2.24 per cent," he says. "I was drawing an income of $40,000 a year and paying $22,000 in fees. It makes no sense."

Bates has settled his case. He manages his own retirement savings and used his experiences for a blog, www.protectyournestegginretirement .com to help other baby boomers with retirement.


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