Wrap fees are disclosed in so many different documents it would take a forensic accountant to work out who gets what.
By Prue Moodie
The first thing most veteran observers of the financial services landscape agree on is that the consolidated reporting and portfolio services known as 'wraps' have generally not resulted in lower client fees.
People whose financial advisers put them into an investor-directed portfolio service (or IDPS, the technical name for wraps) are probably still facing at least a 1.5 per cent portfolio fee before paying any advisory fees.
Even investment fees, the fees that fund managers charge, don't seem to have dropped by much.
What is most astounding to a financial services outsider is the sheer number of pieces the IDPS process can take out of a client's investment pie.
There are investment fees, administration fees, volume bonuses, adviser fees, trustee fees, contributions fees and switching fees. While, strictly speaking, the notorious shelf-space fees don't come out of a client's portfolio, they may affect final pricing.
The complexity is a turn-off for consumers who are used to easily assessing the value of services they purchase. Accountants moving into financial planning face a challenge if they want to stick to a simple fee-for-service charging model, and also use a platform.
Unless financial planners have their own licence, they will often have little choice but to participate in a tangled web of percentage fees, sharing arrangements, and rebates, while trying to reassure clients that they will maintain pricing integrity.
The basic system works as follows:
First the fund manager charges the investor about 100 basis points (1 per cent) to invest in a particular product. In addition to that, the wrap service charges the investor about 60 basis points per investment option as an administration fee. In addition to these two charges, financial advisers can opt to have their advisory fees added in.
If the adviser has their own licence, they can opt for no adviser's fee. But if licensed through a dealer group, the adviser will usually have to abide by the dealer group's rules.
Let's say the dealer group opts for a 40-basis point adviser's fee. The dealer group (which provides the adviser with a financial planning licence, training and probably various kinds of computer support) might keep 20 basis points, and pass 20 basis points on to the adviser.
Under this hypothetical scenario, which doesn't include some of the smaller fees, the client would be charged 2 per cent: the investment fee, the administration fee, and the adviser's fee. The adviser can choose to rebate either the full 40-basis-point adviser's fee, or just their 20-basis point share, and then charge whatever is appropriate. But the adviser probably can't stop the dealer group taking a cut.
Clients would see all the fees, as well as the rebate, itemised in their investment statement. How often they get an investment statement will depend on the arrangement their adviser has with the wrap. This basic model seems understand-able, if a little convoluted. But in real life it's harder to figure the situation out because of all the deals going on behind the scenes.
The first behind-the-scenes payment is the shelf space fee. It's paid by fund managers to each wrap (most wraps, although maybe not all, charge shelf fees) where the fund manager wants to have its products listed.
Shelf fees are kept by the wrap Ian Knox is the CEO of a compliance and training company called Paragem Partners, which also aims to be an alternative service provider for financial advisers who don't want to be part of a dealer group.
He puts the average shelf-space fee at about $10,000 per product per year. But a single fund manager may have multiple products with a wrap for example, an Australian share fund, a protected income fund, or a fixed-interest fund and it has to pay a shelf fee for each one.
Giulio Russo is head of wrap services at Macquarie Advisory Services, a unit of Macquarie Bank and attached to one of the biggest wrap providers in Australia. Russo says Macquarie's shelf-space fees are charged on a cost-recovery basis. At Macquarie they are $5500 per manager, plus $3300 to $4400 per investment [product] per year, he says.
Marianne Perkovic is chief executive of dealer group Count Financial, which has attracted attention for its ability to negotiate fee discounts. In the industry there has been some discussion about what percentage of these discounts should flow to advisers.
Perkovic talked to INTHEBLACK about Count Financial's approach to fees from its badged or white-label version of the BT wrap. 'The shelf fee is not really our issue,' she says.
'We've never had a problem with not having on the wrap an investment that has been recommended by our asset consultant. And the shelf fee is not an issue for the client because it doesn't filter down.'
The next candidate for behind-the-scenes negotiations is investment fees, or management expense ratios.
Perkovic says that because of the dealer group's weight of funds ($5bn plus), Count clients may get a discount of 10 basis points off the 'rack rate' MER of investment products. That discount will be deposited directly by the wrap service into the client's account and disclosed on their statement.
The actual discount off the MER is likely to be at least double that, however, and Count receives at least as much as the client, and maybe more.
How much Count may get, says Perkovic, is disclosed in the financial services guide. She says the adviser doesn't get a share of the MER discount 'because that would represent a conflict.'
Macquarie's Russo says Macquarie also discounts investment fees for clients but doesn't pass any share in the discount on to dealer groups. He didn't comment specifically on the wraps that Macquarie badges for dealer groups.
Rob Ferguson, a CPA with his own financial planning practice called Ferguson Betts, says he'd like clearer accounting of how shelf fees and MERs interact. 'The wraps say the rebate they are giving our clients is based on their clout with the institutions,' he says. 'But how is that rebate being costed? Is it also based on shelf fees? They don't tell you.'
Ferguson says he finds it frustrating that he can't negotiate lower investment rates when he goes directly to a fund manager, despite having considerable client funds.
The third item on the behind-the-scenes negotiating agenda is volume bonuses. These are discounts off the standard administration fee. 'For example,' says Perkovic, 'Count clients pay an administration fee of 80 basis points.' (Perkovic is bundling the advisory fee in with the administration fee in this example.)
'Count gets about 40 basis points,' she says. 'That's the beginning point. Count may get more depending on how much it puts through. If we get a rebate we keep some of the rebate and give the adviser the rest.'
In other words, when Count pushes the core administration fee below 40 basis points it collects the saving and decides how much to give each adviser, based on the size of the adviser's practice. The adviser then decides how much to give the client.
Perkovic says the statement of advice the client receives at the beginning of the relationship will give the breakdown of how much of the volume bonus per product may go to Count.
Then the client can look at their portfolio statement to find out how much their adviser is rebating to them.
Paul Brady, a certified financial planner and principal at planning firm Brady & Associates, approves of wraps because of their functionality. 'Wraps get bagged as being expensive and serving the purposes of advisers,' says Brady.
'But if you can make use of scale, then you can bring total costs down for clients while also offering a better service.
'On the pricing side, there's a bit of competition but I think we could have more,' he agrees, also noting that shelf fees should be transparent.
Brady belongs to a group of similar firms, which, negotiating as one bloc, has lowered the effective costs of standard administration fees charged by the group's wrap service provider, Macquarie. 'We just pass the reduction on to the client. But that could have been a volume rebate that we didn't pass on,' he says. 'We would have had to disclose that to the client.
'This suits me because I'm a principal,' Brady continues. 'Some dealer groups retain all or part of any negotiated reductions. The profitability of a number of advisory firms depends on the volume rebates.'
Ian Knox thinks that the starting-point administration fee should be 30 to 40 basis points, but he says advisers who negotiate together in order to achieve economies of scale could force the price significantly lower than this.
ASIC recently asked for submissions about its review of the regulation of IDPS schemes. The review included a proposal that product disclosure statements for certain linked financial products should include a standardised fees-and-costs template, an additional explanation of fees and costs, an example of annual fees and costs for a balanced or similar fund, and a boxed consumer warning.
The disclosure of shelf fees is not specifically dealt with in ASIC's current IDPS policy and is not included in its review of IDPS policy.
ASIC is still in consultation phase, and hopes to announce its revised policy by March or April 2008.
Tips for fledgling advisers:
be upfront when interviewing a prospective dealer group
what investment vehicles (wraps, etc.) are approved by the dealer group?
who gets what portion of the fees?
how are scale benefits calculated with regard to fees?
can I pay the dealer group separately for services?
can any commission be rebated at source, that is, deposited straight into the client's account? Or do they go through the dealer group?
are the volume rebates able to be rebated at source?
can I easily understand how the pricing structures work and expect my clients to understand?
