Investors are paying more than $2 billion a year for advice and administration services through master trusts and wrap accounts, according to research conducted byDexx&r.
Given this substantial aggregated figure, the question facing the industry is whether the burgeoning platform market is providing investors with value for money. Over 80 per cent of retail investment money is now invested via master funds or wrap accounts, with more and more financial planners adopting them for their back-office functionality and flexibility.
The $2 billion in fees excludes money paid to fund managers for individual investments unit trusts and managed funds.
Drawing on Dexx&r’s independent master trust and wrap account research it is possible to estimate the level of fees being paid by investors.
To calculate the fees, the research assumed an account balance of $100,000, that the fund returned six per cent per annum and inflation was three per cent each year, and in addition, a 15 per cent tax was applied in year one to superannuation investments.
It was interesting to see how the fees for trusts and wraps were broken down. When a retail investor puts money in a fund they will usually be charged an initial upfront fee, says Dexx&r managing director Mark Kachor.
Following this initial charge, Kachor explains the ongoing fees are broken down into a management charge, platform provider administration fee, an investment management charge, with each calculated as a percentage of the fund balance.
The ongoing charge also includes a flat-fee member charge, switch charge (if investments are moved around and can be a percentage or flat rate), and custodial charges. The manager nets off the cost of the transaction for buying and selling within the fund.
It is vital to look at each component of the fee to work out the total cost.
“Most platforms are similar, but the range of fees can vary between providers. They each apply charges, but have different ways of imposing them,” Kachor says.
The ongoing charges can range from 0.02 per cent for passive, cash and capital funds, according to Kachor, or go as high as 1.4 to 1.6 per cent for property funds.
According to the research, initial fees for super funds were found to range from zero to 6.15 per cent, and from zero to 2.15 per cent for ongoing fees. In respect of non-super, initial charges were zero to 5.50 per cent and zero to two per cent for ongoing fees. The average initial fee was four per cent and 1.5 per cent for ongoing fees.
Initial fees are set by the adviser, with an upfront fee of anything ranging from zero to six per cent. The amount is not regulated. There is also an adviser service fee, which is agreed in advance with the client.
“If the investment manager achieves his targets and quality advice is given, you will get few dissatisfied clients,” Kachor says.
Kachor adds that there is ongoing pressure on providers to focus on administration, as increased competition by more companies entering the market is putting downward pressure on investment fees.
And according to Kachor, with the level of fees at their current rates, it is easy to see why Westpac was so keen to acquireBT, namely for its wrap platform.
For the platform providers it means there is $2 billion plus in annual fee revenue up for grabs.
Major platform providers likeAsgard, BT,Macquarie,MLCandNavigatorrun technology intensive businesses and millions of dollars are spent each year upgrading systems. But it is questionable how much administration the average investor needs.
The lack of transparency on fees is shielding the industry at the moment, but with another year of negative equity returns in the pipeline, Kachor says the pressure on fees will only increase.
In defence of criticism on fee levels, BT’s general manager of its wrap product Mark Smith says providers using low charges to attract clients are unlikely to succeed over the long-term.
“It is never just about price. Look at other industries, such as the airline industry, where companies try to take market share on cost alone. They don’t last in the long-term, which affects the client and means they have to reshape their whole business model,” he says.
“Companies that do this will not get clients, who aren’t solely interested in price, but other issues like sustainability.”
He explains that fees are an outcome of the functions of the platform, the actual product, technology, service quality, commitment to developing and upgrading as legislation and demand changes, and the ability for the entity to look at cross-selling.
In his view, the likelihood that the level of fees will change depends on one of these components altering, which Smith does not see happening in the near to medium future.
Mercer Human Resource Consultingexecutive director Peter Promnitz says the top four banks and AMP compete vigorously against each other, and with fees at all-time lows, it is hard to see them reducing from current levels in the near future.
