Tips on master trusts and wrap accounts

More and more people are being encouraged by financial advisers to invest their money through master trusts or wrap accounts. These structures are also becoming more common for superannuation accounts.

Master trusts and wrap accounts can certainly offer convenience and savings for advisers, as well as benefits for you, their client. However like any other financial service, these benefits can also have some extra costs for you.

So it's worthwhile taking a second look to check that a master trust or wrap account really suits your personal needs and circumstances. Read our tips, and if you have any concerns, discuss them with your adviser, master fund or wrap account operator or superannuation fund.

How master trusts and wrap accounts work

Basically, master trusts and wrap accounts allow you and other investors to pool your money together to create a fund large enough to access wider investment opportunities or save costs.

Wider investment opportunities than you could get directly by yourself. Large financial institutions can often access investment opportunities at lower cost and may be able get a wider range than individual investors. So by pooling individual investors' funds together, the master trust has sufficient funds to 'buy wholesale'. Some master trusts offer you hundreds of different investment choices.
Savings in compliance, administration and reporting. Advising, managing and reporting on investors' money can be an expensive and complicated business. It can prove cheaper for the adviser or superannuation fund trustee to spread the costs across a larger pool of members through a master trust. Master trusts and wrap accounts can also offer simpler and clearer reporting to you about how your investment is performing. For example, you may be able to get daily unit prices in one place for all your investments over the internet. They can also make it easier for you and your adviser to manage your affairs.

Even though your money is pooled with other investors', you still keep some control over your own investment. How much control you have depends on exact terms of the trust or account. It's usually easy to switch investments or change strategy at any time by instructing your adviser or the master trust or wrap account operator. Sometimes you can do this over the phone or through the internet.

Take a second look

Check the fees
Master trusts and wrap accounts can add to the cost of managing your investments.

Some master trusts may impose an entry fee as high as $500 for every $10,000 invested, or 5%. In this case, you have immediately reduced your invested funds to $9,500.

Ongoing fees can also be higher. For example, the most common ongoing yearly fees charged by fund managers on individual accounts range between $50 to $250 for every $10,000 invested, or 0.5% to 2.5% per year. With master trusts, ASIC has found examples of ongoing charges for investors amounting to as much as $450 for every $10,000 invested, or 4.5%, per year. Fees as high as this can make a big difference to your overall returns, so make sure the benefits outweigh the costs.

Compare the difference between investing directly and using a master trust
Especially for more conservative investments, like cash management trusts and bonds, you may find there's little difference in price. In some cases, you could end up actually paying more to use the master trust than if you bought into same investment as an individual investor. (Of course, there may be tax reasons or other considerations that affect your situation.)

Check you really need the extra features
Some people want to choose from an extensive range of investments or want to switch investments around frequently, perhaps even daily.

However, you may be satisfied with a more restricted choice and with leaving your investment more or less unchanged over many years. For example, if you invest in a diversified managed fund that uses a range of different fund managers, you may adequately spread your risk and have little reason to change anything. Or, as a superannuation fund member, you may be willing to let your superannuation fund trustee choose investments on your behalf.

Find out if the trust is an in-house or open access fund
This can really affect the flexibility of your investment in future. For example, an in-house fund may be operated by your adviser and open only to clients of their business. That means if you want to change advisers, you may have to exit the fund, possibly involving exit fees and capital gains tax. Open access funds allow you to shift advisers without leaving the fund.

What's best for you?

It's your money. If your adviser recommends a master trust or wrap account:

check the fees
check if you need the features and
check the future flexibility of your investment.

More information:

FIDO Website: Printed 07/29/2010