A matter of trust.

A couple of years ago my brother left his Government job and was eligible to take his quite considerable superannuation benefit out of the fund. Like the smart lad he is, he contacted me to run my eye over the recommendations his financial planner had made for rolling over his benefit.

The advisor suggested that he put all of his super into a master trust so that ‘all the accounting and tax reporting would be done and he would receive a quarterly report showing the performance of his investments’. Now some of you probably won’t know but superannuation funds are taxed internally and, until redeemed, don’t impact on an individual’s tax situation and, because they should be structured as a long term investment and shouldn’t be changed around very often, the idea of receiving quarterly reports is ridiculous overkill. The recommendation of a master trust was blatantly inappropriate.

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UPDATE: This ad is an example of why the FSRA is a waste of time. While offers of 46 times (invest $1000 and receive tax benefits of $46,295) are not considered illegal, uneducated investors will continue to get ripped off.

I assumed that the introduction of the Financial Services Reform Act made it more difficult for advisers to pull the wool over consumers eyes, but it appears it isn’t having the effect expected. So it was with some interest that I read in the AFR Smart Investor 14/4 ( subscription required) that it seems mastertrusts are still the flavour of the month and many advisers continue to recommend putting their clients into products which are inappropriate.

Have you been shoved into the wrong product? Investors who read about last week’s Australian Securities and Investments Commission report on preferential remuneration may have been alarmed to see master trusts featuring so prominently in the investigation.

Preferential remuneration is when advisers get higher commissions for recommending in-house products than those offered by other fund managers. Asic’s report covers a multitude of areas, and is mainly about the proper disclosure and explanation of fees, but one of its main findings concerns appropriateness of master trusts.

Since master trusts and wraps known generically as platforms account for 59% of retail public funds under management, many readers will be wondering if they’ve been sold the wrong product.

It’s a good question because large financial institutions now own 60 per cent of the top 50 adviser groups, and partly own another 12 per cent. To answer the question, and work out if a platform is right for you, there are a few things to consider.

Let’s start with the basics: what a platform is, and what it’s for. There are two ways you can buy a managed. fund. You can go directly to the fund manager and buy in to the fund you want, whereupon you will be charged a management expense ratio, or MER which will be set at a retail price [ususally about 2%]. If an adviser recommended this product to you, then you might have to pay an adviser fee too, but then that’s it: no one else is involved, or will take a fee. You’re responsible for tidying up the performance and paperwork at the end of the financial year, and for doing the necessary accounting.

The second way is to go through a master trust or wrap. These are typically run by large institutions and give you a choice sometimes called a menu of dozens, maybe even hundreds, of different funds. You get charged a master trust fee for buying a fund through this structure, but there are two advantages. One is that you get access to wholesale funds that you couldn’t buy on your own, and which often come at a lower [management] fee than retail funds; the other is that administration and accounting is much simpler because the master trust will compile all the information you need.

Platforms have become enormously popular. Fund Market Monitor, a joint venture between brillient! and Plan for Life which publishes platform data, says that in 1991 platforms accounted for only 6 per cent of retail funds under management, yet in just over a decade they have become the majority.

For the year ending September 30 2003, non-super master funds reaped net fund inflows of $2.88 billion, which appeared to be at the expense of non-super retail funds given this sector suffered similar levels of outflows with $2.98 billion pouring out over the period. The pattern was similar for super master trusts and retail funds, with the former experiencing inflows of $7.36 billion and the latter outflows of just under $1 billion. However despite these outflows non-super retail funds continue to hold sway in that part of the market in terms of net assets, with $47 billion in assets compared to non-super master trust assets of $37.5 billion. In super however master trusts are dominant with a staggering $107 billion in assets compared to only $19 billion for traditional retail super funds.

This means that more than $175 billion of public money goes through these structures, and it’s going to keep growing. There is some criticism of platforms, notably by the Australian Consumers Association.

They fall into three camps: one, that extra layer of costs that comes with a master trust is unnecessary, or least not worth the benefits it brings; two, that the resulting convoluted fee structure is not transparent; three, that people don’t really have choice between platforms because often their financial adviser will already be affiliated with a particular institution and will push business towards that institution’s product.

In particular, it’s often said (and is reiterated by Asic) that for people with small account balances, platforms really don’t make sense. Some of the more candid providers will agree. BT’s head of retail Ron Coombe told Smart Investor late last year that investors with $50,000 or less might be better off putting their money into a single multimanager fund. Others have launched baby wrap accounts – Macquarie’s Accumulator is an example – to accommodate lower balances.

So what’s worrying Asic? Its survey picked three financial institutions that own financial planning networks; … and examined 405 files. It found that almost three quarters of the consumers had been recommended to use a mastertrust as their principal investment. Although many files contained general explanations about why that was the right type of investment, less than 10 per cent documented specific explanations of why a master trust was recommended to the client. This is the substance of Asic’s complaint; not that master trusts are bad, but that advisers aren’t properly explaining why they’re good.

Consumers may pay higher continuing fees or trails that is, those that repeat year after year than if they had bought directly. Asic points out that when you buy through a master trust, you pay a wholesale fund manager’s fee (for the underlying funds) of between 0.5 per cent and 1 per cent and a master trust fee of between 0.5 per cent and 2 per cent, plus , an adviser’s fee of between 0.5 per cent and 1 per cent. This results in a fee structure of up to 4 per cent, the report says. The higher level of fees is often explained as being for the service and flexibility offered by a master trust, However, as an alternative, a consumer could invest into a retail product with a fee of 1.5 per cent to the fund manager and an adviser’s fee of 0.5 per cent, representing a much lower fee structure. A small difference in fee levels can make a large difference to longterm savings.

But we consumers shouldn’t worry because since March 11 we’ve been protected by the FSRA.

The Financial Services Reform Act 2001 (FSRA) imposed a new disclosure regime on the superannuation and investment industry from 11 March 2004, backing it up with a comprehensive and relatively accessible damages regime. Through this mechanism the government hopes to manage the competing interests of consumer protection and the dynamic economic growth that the finance industry offers. While the primary aim of the FSRA is to increase the standards of compliance and quality of information provided in the financial services sector a further consequence will be an increase in transparency and market competitive performance within the superannuation industry, an industry that controls approximately $550 billion. Which, according to all the regulatory bodies, has increased compliance requirements to the point where no one can get ripped off.

There are those such as the IPA that don’t want regulation of any kind and see the FRSA as ‘anti business’.

The Act is a threat to the future of the majority of Australian investors. Most Australians now look to funding their retirement from the savings invested in superannuation. The Act, by inducing trustees and other fiduciaries to pursue non-financial goals and the interests of people other than the unit-holder, can be expected significantly to undermine the returns in superannuation funds. The Act is a thoroughly bad piece of legislation and the parts that pertain to reporting labour, environmental, ethical and social standards should be repealed.

I consider the FRSA to be a load of bull shit! The crims and scammers are busy finding new quasi-legal methods of cleaning out the life savings of the uneducated which the regulators will uncover two years after the funds have been lost with the long suffering consumer still out of pocket. The only way to slow up the wide boys in the industry is to educate consumers, starting at school and continuing with government funded education programs for adults.

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