Advisers favour passing master trust responsibility

Why would a dealer group set up their own master trust when there are plenty available out of the box?Kate Kachorlooks at three different answers to this question.

Ten years ago if you mentioned the phrase master trust, dealer group managers would stared with blank faces. These days those same managers have the luxury of having master trusts provided in three different ways.

Apart from building their own from the ground up, dealer groups can also badge an existing third party product; or just outsource its master trust requirements.

For many dealer groups, having to start from scratch and create their own master trust in a highly competitive market is not too appealing. The concept of badging a master trust product is beginning to catch on but many dealer groups still choose to outsource.

So what's the best choice? Like many other areas of financial services industry groups are divided.

"Its bloody expensive," Ipac chief executive officer Peeyush Gupta says of entering the master trust market.

Gupta has first hand experience of the costs involved as Ipac Securities took the path less travelled and created its own master trust structure in early 1990. The group's fund, Strategic, began as an ordinary investment trust, later branching into an umbrella fund and is today classified as a fund of fund.

Gupta says the decision to allow Strategic to develop into a fund of fund has not hindered the group's annual returns. At present the group has more than $3 billion funds under management, with 30,000 investors with the group.

But Gupta says for dealer groups looking to create their own master trust structure, they should have no less than five million dollars on their balance sheet.

However, if a dealer group can't make the grade in having the necessary underlying funds, Gupta says there is an alternative and groups should seriously think about making company alliances.

In line with this approach, Ipac has developed an alliance program for financial planners and small dealer groups. The Strategic Partner Program has been running within the company for many years and provides advisers with a build, run and exit approach to alliances designed to help these groups build their own master trust.

"The alliance program helps guide financial planning businesses in building running and exiting such services within their businesses," he says.

"The program has been around for many years, and already we have more than 30 small, and independent financial planning groups working through the institution. It is an alternative but it is still costly."

Another group which wrestled with the pressures of entering the master trust industry was Count Wealth Accountants.

Count chose to badge an existing product through BT Funds Management and say this choice of selecting a master fund product was beneficial but still extremely costly.

Count managing director Barry Lambert says unless industry players are certain that their business can make some big money in a short period of time then it just becomes too costly, especially for small groups.

"If you're big enough then the cost won't be too hard to deal with, because there is a large cost to badging. If you can't make $1 billion in a short time, badging might be just a bit of glory for no return," he says.

In June last year Count also made the decision to badge an online wrap account from BT also. Lambert says, the initial stages of badging its wrap account was damaging to the group financially. Following a restructure of the business last year, Lambert decided that as part of the wrap product, no income would be taken from the group's advisers leaving them with 100 per cent of any fees.

"That approach did do some financial damage to us at the outset but in the long term it has benefited both parties."

He says to help offset some of that early damage Count built a small fee into the wrap account vehicle. The fee, which Lambert says is minimal still makes the wrap much cheaper for Count's adviser than those from the bigger players.

The company restructure has helped boost Count's wrap standings. Recent figures show the group's funds under management have grown from $35 million in July last year to a staggering $400 million to date.

Lambert says the group estimates the wrap will reach the billion dollar mark by June next year, and the two billion mark by June 2002.

On the other side of the coin, one group who has chosen not to create its own master trust or badge a product has been Collins House Financial Planning. The Melbourne based group instead opting to outsource its master trust responsibilities, also citing cost factors.

"For our size of firm we could provide an internal master trust if we so wished, but not for the same cost as many of the other bigger groups, and not as efficiently as others," Collins House managing director Dominic Alifacci says.

"I'm a great believer in master trusts. However, if we did have an internal one, I would have to say I would be biased towards using it. But since we work on a fee basis and now use a range of master trust suppliers, we're indifferent," he says.

Alifacci has been using master trusts since their early inception in the late 1980s.

He is comfortable with his group outsourcing its requirements claiming there is a much wider range of master trusts available in the marketplace. On the group's approved list of master trusts stand such name as AM Corp, Deloitte and Fiducian.

Alifacci says the list of approved master trusts provides greater flexibility for the group as a whole.

The group currently has an overall 200 clients, with $200 million under management.

"Outsourcing has given us the best of both worlds. Not having our own master trust we can have a real impact on the reports, products and approved lists as we are not tied to it," he says

"With our relationship with Fiducian, we have a lot of flexibility in regards to the input in the features of the master trust. There is also an emphasis of advisers being involved, enabling us to tailor make the master trust to all our needs."

The issue of master trust flexibility has been echoed by both Count and Ipac.

Count's online structure for its wrap account provides the flexibility and greater access for those clients currently investing in both the investment wrap and super wrap.

Lambert says the group's dealings with BT also free up advisers from large amounts of administrative paper work.

"We're more friendly to the client. If a client has another badged master trusts, with us they can transfer to the BT trust. Because of our size were probably one of the biggest to deal with BT in this area," he says.

In Ipac's case an effort has been made to extend flexibility across the board.

Gupta says the fund of fund approach has added a vehicle that benefits both the group's clients and its advisers.

At the same time Strategic gives clients more access and control on the asset allocation of their investment while freeing up the workload of the groups advisers.

"In moving from retail funds to choosing wholesale funds within a wrap, advisers are taking two steps back as they still have paper work," he says.

"A fund of fund approach liberates the adviser by freeing them from administration and giving them more time. It's in the best interest of our clients and advisers".