Carving up the remuneration pie

Master trusts and wraps have changed the way clients pay for financial planning services including the use of the platform to manage client investments.

The question is who now benefits most in terms of fees from administration platforms and do they really deserve what they get for the service they provide?

The basis for this question is that while master trusts and wraps have streamlined administration and reporting for planners, they have also added new fees and charges for each entity from the planner to the fund manager running the investments.

Speaking from the fund manager perspective, Deutsche head of retail Bruce Murphy, says the master trust and wraps fees charged at the investment management level are on average less than one per cent.

However they do go above that figure in some cases Murphy says, but only where investments are in product classes that he describes as innovative.

“Prices are dependent on the underlying managers used in a platform and the circumstance those groups work under, such as the size of the equity team, research department or service teams,” Murphy says.

“Smaller teams may be more comfortable with lower fees, but all staff have to be paid out of that managed expense ratio [MER] as well.”

Taking the scale issue in another direction, Murphy says that the size of funds within a platform and interest by clients also has a direct bearing on the fees.

He says managers need to have a large presence within the platform to justify the costs associated with managing funds that flow through the platform.

“It is not a cheap or even profitable setup for managers to offer funds if the volumes of business are low and they look at the demand on products on the master trust or wrap list. If there is a demand, these funds become more fairly priced,” Murphy says.

Head of master trust business at Challenger, John Hamer says the fee issue has become clouded due to the lack of uniformity in the ways fees are reported and in the way they are applied. He says that some are more flexible than others and the best way to break down these differences is through better disclosure.

Confusion arises as fees can be charged either as an entry fee with dial up and rebate options as well as the newer deferred entry fee or the more established trail commission, which varies from zero to one per cent.

Given any of these, Hamer says that most master trusts fees should cost the consumer from 2.5 to three per cent, which would include the advice, administration and MER components, but excludes any other service offerings from planners.

He says manager MERs are usually around the wholesale rate, less than one per cent, and are then at a level where platforms become beneficial, and the remainder of the fee comes from the planner — dealer group split and the platform provider.

“With these figures it is a mistake to claim platform fees are expensive. The provision of consolidated reports creates cost savings and advisers can add more value for clients because they are getting away from being administrators,” Hamer says.

Regardless of how fees are seen, it is widely accepted that margin squeeze will become a much more common event across the industry and master trusts and wraps will be no different.

Murphy says pressure will be placed on master trust and wrap providers by larger fund managers who have high levels of funds in platforms, but in turn the large scale platforms will seek lower prices through their buying power.

At the same time further pressure on fees will be added due to consolidation of platform providers, which will occur as the cost of upgrading technology takes its toll. Some of this has already occurred with high levels of investments already placed through a number of large scale platforms.

But Murphy says fee pressure will extend down to the adviser because they are tied to the consumer and the push for lower fees is still important but is wary of trying to squeeze the margin at that end.

“Distribution is connected to the consumer and planners are running a business as well as giving advice. If there was a push to squeeze the margin there and planners were not getting a fee from the process that would affect the client, which leaves them with the power in this equation,” he says.

But he says it would be wrong to underestimate the costs borne by platforms, such as the never-ending technology spend as well as those carried by advisers like professional indemnity insurance.

“It all comes back to the customer asking does the master trust or wrap supply a better advice package and for the planner being able to focus on the core issues of financial planning,” Murphy says. On this basis the value of master trusts and wraps is justified.

Hamer says with the issue of cost on platforms he feels it is unlikely that planners are taking advantage of the fee structure in master trusts or wraps but rather usually work out fee structures as they have in the past.

At the same time he is confident that platform providers are also not looking at moving their own fees upward but down. This will come about as a result of larger players finding ways to reduce their fees which will force the rest of the market to follow suit.

BT head of wrap distribution Sean West says fees have remained static in the local market despite pressure on them and he has not received any feedback that the costs were too high.

However he does point out that platforms have moved costs and shifted them away from being concentrated at the fund manager or platform provider level but that fee decreases are not just a planner or dealer issue.

“It is hard to tell if there is excess fat in fees but all margins will have to fall over time but how far is dependent on the platform provider, and the transparency in these products will allow planners to ask those questions,” West says.

The recently releasedHyperCompetition Part 2, written by Credit Suisse’s Brian Thomas and Clayton Coplestone claims that platforms have done little for the client. The paper goes on to say that while there have been benefits from platforms, they have all stopped at the planning level.

Coplestone says the reason for making the claim was that platforms provide a technology solution but do nothing for the planner/client relationship and in the future clients will seek to unbundle the service and seek flat fee platforms or consolidated reporting they can access themselves.

Most planners would find the comments a little disturbing and may even argue that master trusts have added something back into the planning relationship, but Perth-based adviser and dealer’s licence holder Nick Bruining agrees with the paper’s position.

“On this point I tend to be the dissenting opinion because when the costs are compared they are more about assisting the adviser than the client. In some cases the fees charged are more than the retail MER,” Bruining says.

For example he says the average platform fee is around 2.4 per cent while the average direct retail MER is 1.8 per cent.

“On a $100,000 portfolio that is about a difference of 0.6 per cent in fees or $600 a year and much more than the cost of having the client’s accountant crunch a little more data at tax time,” Bruining says.

However Bruining says platforms have a place where there are complex portfolios and investments but says much of what passes through master trusts is driven by dealer groups.

“It does mean they can factor in a percentage and also as the profession becomes more complicated it may serve as an easy way out for some advisers. As a profession, planners need to be conscious of all aspects of a clients needs, not just cost and returns.” He says other issues with platforms include the presence of too many people wanting a slice of the fees, which tends to come back to planners, despite the fact they do most of the work with clients.

The managing director of planning group Berkley, Glenn Castensen, says his group is in the process of selecting a single platform provider to move away from the present situation where the group uses a range of platforms.

“The benefits in the use of platforms still have to be sold, beyond the consolidated reporting aspect.”