The rise and rise of portfolio administration services such as master trusts and wrap accounts has seen a lot of bickering about who is doing what to whom in the marketplace. John Wilkinson looks at some of the legal and semantic issues surrounding the services as well as taking a close look at the ways the major players are trying to attract financial advisers.
Clients want consolidated reporting and are not fussed whether this involves a master trust or a wrap account.
Ron Scott, head of BT Portfolio Services, says a product that delivers administrative services as its main feature will experience future growth.
“A master trust is a product while a wrap account is a service,” he says. BT launched its wrap account last October.
Summit Master Trust manager Kim White says wrap accounts are simply an administration service.
“People claim there are differences between what master trusts and wrap accounts do,” he says. “But both are administration services, but there are some legal differences between the two.”
Asgard general manager, group employee services, George Haramis agrees clients and advisers want consolidated reporting of their financial products. “Both master trusts and wrap accounts can provide this,” he says.
“Using technology to deliver service through a back office operation gives consolidated reporting,” he says.
The real differentiation between master trusts and wrap accounts is ownership of the investment asset. In a master trust, ownership is with the custodians, but the wrap account allows the client to become the direct owner. It is argued the wrap account gives the adviser better ownership of the client, as the service provider does not have their details.
While this is true for independent advisers, for those linked to large financial services institutions like the banks and companies like AMP and Colonial, this difference almost becomes irrelevant. The larger financial services organisations are improving their data mining. In the future master trust and wrap account administration will all be one in the same mainframe.
However, ownership of the master trust and the benefits that brings is important for independent advisers, says AustChoice Financial Services managing director Roger Gumley.
The company is a co-operative with a number of independent financial planning groups as shareholders (see story page 26).
“We have a dedicated distribution network for our master trust in which the advisers are the shareholders,” he says.
While AustChoice is offering through its master trust a variety of services, such as on-line broking and banking, not all independent planners are choosing to become linked to one particular master trust.
Colonial head of group investment products Anna-Maria Kwan says independent advisers ‘cherry pick’ the master trust.
“They don’t take the master trust as a whole, just pick out a particular product from the investment options,” she says.
Asgar’s George Haramis says the move is towards providing a service to individual clients through interactive services.
“Initially master trusts put together an enhanced back-office service for advisers, now the master trust is enhancing the service for the investors,” he says.
Gumley says master trusts and wrap accounts have allowed advisers to return to their principle role of giving advice.
Wrap accounts and master trusts are becoming more sophisticated – already Summit is offering credit cards and loans. At the same time, however, the demand on technology and the challenge of sourcing of the products becomes greater.
The ability to source services, such as banking, internally will give a master trust a competitive advantage, says Kwan.
“With Colonial’s allfinanz approach, we can develop the master trust into a one-stop shop product which delivers a range of services for the investor,” she says.
The larger financial service companies can provide these services at a cheaper rate internally than if they are outsourced.
This means the cost of the service can be kept at a competitive level, a point which will become important with wrap accounts, Kwan says.
“Generally the cost of administration for master trusts is too high, but the secret to reduce these costs is to consolidate members’ records to create that one-stop shop.”
Kwan says Colonial is now developing the next generation product which will be a wrap account that looks after the investor “from cradle to the grave”. This service will be available by the end of the year, she says.
BT’s Ron Scott believes master trusts will be swallowed up by wrap accounts as the additional services sought by investors forces the change. BT has recently expanded its wrap account to include personal superannuation and allocated pension investment options.
White says the need to provide more services for the investor means the smaller players in the master trust sector will find it hard in the future.
“We have seen the bigger name players come into the market offering expanded services which means the smaller master trusts will need to have deep pockets for development if they are going to compete,” he says.
“The key to developing master trusts and wrap accounts is going to be technology and processes in the back office. Funds with less than $100 million are going to find it hard to be economical in providing a competitive service.”
Gumley agrees technology is the deciding issue as the products offered through master trusts are now all the same.
“In a crowded market, distribution of the products is the key point. That has to be backed up by service which nowadays is being delivered electronically,” he says.
Kwan says branding is also becoming important for wrap accounts and master trusts. Haramis says major fund managers like Norwich are now promoting master trusts by linking them to the brand.
“We are seeing branding playing a major role in selling master trusts to investors and this means master trust suppliers will need a lot of money to create brand awareness,” he says.
White sees a gap between the master trust product name, like Summit and Navigator, and the fund manager’s name and that will have to be addressed.
For the large well-established brand names such as the banks, White sees instant recognition of their master trust products by investors.
“People will know they are being sold a product that is run by a bank, but with wrap accounts which have such a diverse selection of products, this might create branding problems,” he says.
