Price, service and administration competence are clearly not the only criteria considered by employers in purchasing the services of master trusts. If they were the only criteria, master trusts would have attracted a mere fraction of the business which they have managed to win and retain over the last five years. This is not to suggest that all master trusts are unworthy of that sector’s considerable success in accumulating funds under management. On the contrary, there are some highly competent operators in the industry, whose considerable efforts in developing the “right” offering have been well rewarded.
It is also evident that while master trusts have the look and feel of generic products, they are not all the same. Pricing varies enormously, which can be established provided one has the “rocket scientist” abilities to wade through the (intentionally?) confusing maze of fees. Service is patchy, ranging from outstanding to non-existent.
As for administration competence, which should be the principal criterion upon which a choice of provider is based, this has improved substantially over recent years but is becoming so complex and accordingly expensive that, with few exceptions, much of the industry is in the process of being consolidated into the hands of a few large institutions with the financial muscle to deliver on their legal requirements and service standards.
It is a curious phenomenon that while the master trust sector has burgeoned in terms of market share, the self-appointed “conscience of superannuation”, the industry funds, have languished at around 10 per cent of the total market. This has occurred even though their fees are much lower, their returns are higher, their administration competence is average to excellent, and they are not seen to be connected to the big institutions which the community loves to hate.
The explanation for this phenomenon lies in a combination of factors, including the view that industry funds are only for award staff with “small balances”, the perception that investment choices are limited and the incorrect but understandable impression that industry funds are “owned” by trade unions who will cause trouble for employers, particularly small employers, who are naïve enough to sign up. Overarching all of these reasons lies the lack of a distribution network, the industry fund movement having decided many years ago to have no connection with commission-based financial adviser networks, against whom they have railed at every possible opportunity, particularly through their media spokesman, Bernie Fraser. This attitude, while commendable at one level, has cost the industry funds dearly in terms of potential market share.
The slack has been enthusiastically taken up by the master trust sector which continues to grow even though investment markets have been ordinary for over two years.
If the master trust sector has a structural weakness, it involves the conflict of interest flowing from the matter of ownership of trustee companies. Strictly speaking, the money in a master trust is owned by the members. However, the effective control of that money lies in the hands of the trustee, which has the power to decide upon all manner of things, including who will administer the fund and who will manage its growing pot of gold.
These days, most master trusts of any reasonable size are controlled by trustee companies which in turn are owned by large financial institutions. The role of the institutional owners is to accumulate funds under management as quickly as possible by any legal means, whereas the role of the trustee requires it to act at arm’s length from the marketing hype (even the hype from its owner) and to make independent decisions in the interests of fund members, irrespective of connections between the parties.
Poor investment markets have caused a focus on this conflict, because institutional owners are feeling the heat of funds outflow, a reducing capital base, consequential lower management fees and falling profits.
In these circumstances, the temptation exists to put subtle heat on a related trustee to ensure that the sponsoring financial institution is favoured (or at least not detrimentally affected) when important decisions are taken. There is no doubt that trustees who are currently in this position are extraordinarily mindful of their positions and as a result, may well err in the opposite direction.
Nevertheless, I have observed that some corporate clients of these “institutionalised” master trusts are similarly mindful and more than a little sceptical. This issue has not yet become a matter of great moment in the industry, but has the potential to be so in a growing environment of transparency and disclosure.
Anticipating a conflict and dealing with it before it becomes a drama has always been the best policy. Any trustee whose current circumstances may lead to a conflict, or even a perception of conflict, should review their internal processes. The existence of the conflict is not the problem. The problem lies in the unwillingness or inability to deal with it.
Robert MC Brown is an executive director at Bridgeport — Advisers & Asset Managers.
