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Wrap accounts: The next revolution in portfolio administration systems

In the first of a series of articles on wrap accounts Philip Macalister explores the difference between these systems and master trusts.

Thursday, March 11th 1999, 12:00AM

by Philip Macalister

Wrap accounts have been described as the next revolution in the way financial planners manage their clients' affairs. Currently they are all the rage in Australia and this is no better illustrated by the fact that, within the space of little more than a week, there were three conferences in Sydney devoted to the subject.
Good Returns attended one of the two-day conferences and will be running a series of articles looking at wrap accounts.

While wrap accounts are all the rage at the moment there is a big question over what is the difference between a wrap account and a master trust?

There is no clear answer to this question. Both are streamlined, cost efficient administrative services relating to overall investment arrangements of individuals.
Master trusts were the first wave of administration systems and have proved to be popular, and now have many billions of dollars under management. (Asgard is the leading master trust provider in Australia with A$5.25 billion under management).
Wrap accounts are essentially a variation on the master trust theme, however have only just started in Australia.
AM Corporation deputy chairman Michael Devlin says master trusts are a peculiar Australian development stemming from the superannuation framework, and they have adopted a classic trust structure.
Wrap accounts, he says, come from the United States and are the brainchild of stockbrokers who wanted to "get more of the action".

Key differences
One of the key differences between the two systems are that master trusts have become heavily regulated by Australian authorities, yet wrap accounts remain unburdened. Because of this different treatment providers are rushing to be the first to launch wrap account services.
Devlin says the if wrap accounts do become regulated the differences between the two systems will blur and they will co-exist more or less as two versions of a similar service.
The other key differences relate to their structure, service delivery, flexibility and costs.
Master trusts use a trust structure, while wrap accounts are a pure administration system and can include custodial elements.
While wrap accounts are currently unregulated the Australian Securities and Investments Commission (ASIC) are reviewing their status as they metamorphose from a purely administrative custodial and accounting/reporting function to something more akin to public offer in nature.
The ASIC has described wrap accounts as being substantially similar to discretionary master funds.
A clear difference between the two systems is that master trusts tend to operate with a defined listed of, usually, traditional asset classes, while a wrap account has the ability to encompass an investor's total personal balance sheet, including mortgages, banks accounts and investments.
Devlin says the success or failure of wrap accounts compared to master trusts will come down to service delivery.
"Neither has a killer advantage," he says. A good master trust service will beat a bad wrap account and vice versa.
He says investors are more likely to forgive underperformance as opposed to poor service.
New Zealand perspective
Good Returns asked two New Zealand administration service providers for their perspective on the difference between master trusts and wrap accounts.

Craig Dewhurst, Ausmaq general manager New Zealand: A master trust is an investment product and subject to the costs of tax and compliance requirements such as an investment statement and prospectus for the trust, and provisioning for capital gains. The trustee owns the assets and there may be fees payable by the investor when entering or leaving the master trust.
Wrap account structures generally allow the client portability through the client retaining beneficial ownership of the underlying investments, which retain their original characteristics even when transferred in and out of custody.
This is particular relevant from a tax perspective, where providing that the client is not a trader, the client can expect to hold investments directly through a wrap account service and not be taxed on capital gains.
Wrap account structures also tend to accommodate a wide range of investments typically held by clients, whereas most master trusts have a limited range governed by recommended lists of fund managers or assets.
Both options will be with us for some time and will be increasingly available on the same technology structures.
A most important factor for the adviser is that a wrap service makes the investor a legal client of the adviser, whereas a master trust investor becomes a legal client of the master trust provider.
The key determinants for the future will be the increasing demands of clients for a consolidated statement of financial position and pressures to reduce costs of delivery by smarter use of technology. If this is so, wraps will become the industry norm.

Peter Baynes, Jacques Martin New Zealand, chief executive: The fundamental (and very clear) difference between a wrap account and a master trust is that the former is a custody service for investors whereas the latter is an investment product. Both achieve significant benefits in efficient portfolio management and consolidated reporting.
A typical wrap account service has at its heart a cash management vehicle. The investor contracts with the service provider to buy and sell a wide range of investments such as unit trusts, equities and bonds. The service provider will usually have arrangements in place with retail unit trust managers to buy and sell units in funds free of entry and exit charges and at reduced, ‘mezzanine’ annual management fees. The service provider undertakes custody of the assets, collects dividends etc and, importantly, consolidates all information into a single investor report, generally on a quarterly basis. That report will include matters such as cashflows and performance of the portfolio.
A master trust also has a cash management vehicle at its heart and offers a wide range of investments. However, these investments are offered within the umbrella legal structure of the master trust. Typically, in New Zealand, they would comprise unit trusts, superannuation schemes and other pooled investments. Importantly, the master trust provider (or a related party) is likely to be the issuer of the investments within the structure and investment managers will be appointed for each of them on a wholesale basis. Thus, whereas a custodial wrap service brings together the disparate products of various issuers to create a portfolio management capability, the master trust is a multi-portfolio product which is designed to achieve a similar result via a range of wholesale funds under a common legal umbrella. Consolidated reporting of the entire investor’s portfolio is as much a key feature of the master trust as it is of the custodial wrap account.

Philip Macalister attended the AIC-organised Wrap Account conference in Sydney with the assistance of Ausmaq New Zealand.

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