The master trust industry has revolutionised how managed funds are distributed. We only have to take a look at the actual number of master trusts in operation today, plus the huge increase in the average number of investment options available within them to appreciate how popular they are. This includes their simplicity from the adviser perspective whereby a menu of products is offered for a fee and from the investor perspective where a menu of products is available for a single wrap service fee.
But the popularity of the master funds model doesn’t guarantee value for money. Today’s master funds are deficient in performance areas including proper pre-trade risk analysis and pre- and post-trade compliance aspects. Further in an after trade sense their ability to give timely and individualised performance metrics is left wanting.
However, it is this take up rate among the investment community that is of most concern. We believe that as the essence of master trusts has been to provide investors with a choice across a multitude of fund managers, now that this initial goal has been fulfilled, investors will be searching to meet their next need.
This will place the focus on full fee disclosure leading to a review of the manufacture, distribution and administration of investment offerings for the future.
In my book, investment punters are getting a bad deal at the moment. I cannot think of any argument that supports the non-disclosure of fees either fully or in part. Increased disclosure, in fact, complete transparency of fees, will assist in the further development of the industry and we all gain.
This will take place in a couple of main areas. Firstly, it will allow investors to understand where their fees are going and they will be encouraged to make value judgements on whether they believe this is good for them or not. Secondly, this will allow market participants to see what other providers are effectively charging and will lead to a greater and more informed level of competition. Ideally the available profits will be able to be more evenly distributed throughout the industry rather than “sticking” to one particular organisation that simply had a better marketing strategy, rather than a better product or performance.
Advanced and successful marketing techniques simply seem to foster higher fees and in no way relate to annual returns for the investor.
But regardless of whether the investment industry bows to community pressure and/or the threat of Federal government mandates on the issue of fee disclosure, the ability of master trusts to thrive in the future also firmly hinges on the growing sophistication of the Australian investor. Choice has become an accepted offering for investors but the challenge remains in how to deliver choice for the future, and in the most economical manner.
The industry needs to reduce the duplication of effort in product distribution via multiple platforms and instead move towards the hotly contested area of “the mega platform” to achieve this.
Master trusts need to evolve and that evolution is both simple and extremely cost-effective for all involved via the growing demand and awareness of the mega-platform model. Mega-platforms are defined by a model that includes broking, funds management, wrap facilities, custody, master trust services, individually managed accounts (IMAs) or separately managed accounts (SMAs)
This evolutionary path would see the industry segment itself into three primary functions.
One is asset management in which investment managers will concentrate on stock selection and product creation. Then at the other end of the scale there are the adviser networks, and they, I believe, are best qualified to give advice to the people who buy investment product, and they are obviously the major distribution arm as well.
Within that I see the creation of an investment services and distribution administration.
And what of people who disagree that master trusts will continue to exist in the manner to which they have become accustomed?
Mega-platforms do not currently exist in Australia — precursors to mega-platforms may exist in the forms of the four pillars, but they are not offering more master trust offerings with creative direct investment options on a global scale, nor are they passing on cost savings to the end investor.
Instead, they are retaining the profits and ploughing them back into marketing programmes and distribution deals with no end benefit to the consumer — who, after all, is the one with the equity on the line.
— Ian Mathieson is managing director of DST International.
