A wrap platform is the financial adviser’s most utilised tool. It allows them to build portfolios for their clients, both for superannuation and personal investments. Conveniently, it also allows for smooth processing of the annual fee deductions that form the lion’s share of an adviser’s revenue.
Anyone who has seen an adviser will likely have been pushed one of these products. The benefits of using one being made to seem like a no brainer. But are they really all they’re made out to be? What are the real costs compared to the alternative?
What is a wrap platform?
A wrap platform functions as an all-in-one investment account where you can buy managed funds, shares, ETFs and hold cash. It also allows you to access managed portfolios not available anywhere else. It is called a wrap platform as it allows you to ‘wrap’ all of your investments into one place, rather than holding different brokerage accounts.
A wrap account can either be for normal investment purposes, or they can also be used as a standalone superannuation fund as well. These accounts allow access to a much greater level of investments than the standard industry super fund provides.
Most importantly, a wrap platform allows your investments to be managed by your financial adviser. In fact, the vast majority of accounts can only be opened via an adviser and are not accessible directly. In most cases, a client cannot directly manage their investments either, it must be done via their adviser.
The largest wrap platform providers include Macquarie, BT Panorama, Netwealth, HUB24 & North. It is incredibly likely that the vast majority of advised clients will have money in one of these platforms.
In general, wrap accounts are used by advisers to build and manage both investment and super portfolios for their clients.
Why are they used?
Wrap platforms have some unique benefits when compared to using a typical super fund or investment brokerage.
Access to wholesale and unlisted investments
Wraps provide access to thousands of managed funds as well as listed shares and ETFs. These managed funds are usually offered on a ‘wholesale’ basis. To access these types of funds outside of a wrap account either requires a considerable minimum investment or a requirement to use a retail version of the fund, which is usually more expensive.
They also provide access to unlisted investments like property trusts that are generally not offered to the public. These can have unique characteristics like minimum investment terms and limited withdrawals. Charter Hall is a large provider of these types of investments.
A financial adviser will generally use a number of managed funds to build their portfolios for clients.
Simplified tax reporting for investments
Due to these platforms ‘wrapped’ nature, the tax reporting of these accounts is made much easier than holding all of the investments directly. A wrap platform will produce a comprehensive tax statement each year to be used for accounting purposes. This compares to holding multiple investments individually, like ETFs, where the tax implications of each needs to be measured independently. This can save a considerable amount of time for accountants, especially if the portfolio is complex.
This tax reporting benefit is really only relevant for investment accounts, not the superannuation version of wrap platforms as the tax is managed internally.
Tax Benefits in Super
Standard super funds have a tax problem wherein capital gains cannot be built up over time. This means that members do not get to benefit from these capital gains being taxed at 0% when you retire and move your super to pension phase.
Regular super funds pool all the money from their members together, to then be invested. Each time someone leaves the fund, assets may need to be sold and thus capital gains tax paid, resulting in less returns for you. More on this topic can be found here: The Tax Problem with Industry Super Funds.
Wrap platforms for super differ in that they are taxed individually. That is, each account holds its own tax situation with no external impact from other people.
This creates the opportunity to build up capital gains whilst working and in accumulation phase. These capital gains can effectively be wiped when moving to retirement and pension phase. This is because wrap accounts allow for ‘in-specie’ transfers, where no assets need to be sold when moving to pension phase.
This can considerably decrease the amount of tax payable within super when compared to a standard industry fund.
Adviser reporting and management
A large reason these platforms are used by advisers is because they allow for direct management of a client’s portfolio. The adviser can make trades and rebalance holdings on behalf of the client. This allows the firm to implement the recommendations they make, rather than relying on the client to do it themselves.
The performance of the underlying portfolio can be shown through detailed reporting capabilities not usually available in other types of investment accounts. Advisers tend to use these metrics in their review meetings with clients.
Advice fees
Advice fees are arguably one of the biggest reasons for wrap platforms dominance in advice firms, particularly for super accounts. These platforms are built for the adviser, and thus they are built with advice fees in mind.
These platforms make it as easy as legally possible to set up both once-off and ongoing advice fees to be paid directly from the account. Compare this to some industry super funds that restrict advice fees, and it makes sense why wraps are so ubiquitous.
The ability to charge a fee directly from a portfolio is convenient. It ties the advice fee to the costs of the account itself, rather than being directly for a service that the adviser is providing. The psychological difference between this and invoicing a client directly can often be the difference between them continuing the engagement for another year or ceasing it. One must be paid purposefully out of a bank account by the client, the other is simply deducted on a monthly basis through the platform.
The obvious question is would advisers still use these platforms if advice fees were not able to be deducted?
The problems
When a wrap becomes a trap
Just like wrap platforms cannot be opened without the assistance of an adviser, many platforms do not allow a client to manage their investments without an adviser. This realistically means that in order to maintain your portfolio and the utility of the platform, you will need to continue to pay the adviser each year.
Even if a platform does allow a client to manage their portfolio without an adviser, they often make it as difficult as possible. Things like requiring all asset changes to be made via a paper form. Yes… like the 1990s.
If the adviser has used particular portfolios, like Separately Managed Accounts (SMAs) in your account, they often reserve the right to divest your money if you have no adviser. The thinking is that this is a product solely for advised clients, if you’re no longer that, bad luck.
In most cases, if you no longer wish to pay a financial adviser, you will eventually look to move your money elsewhere. This is where it gets worse, especially with super. All the tax benefits mentioned earlier about being able to build up capital gains in your account disappear if you need to move the money elsewhere. This essentially creates an additional transaction cost in the form of capital gains tax.
For normal investment accounts, wrap platforms do actually allow for in-specie transferring to another account. However, finding an investment account that offers the wholesale funds that advisers use to build portfolios will prove incredibly difficult. Even if you do manage to find a place to move it to, there are fees involved in this transfer too.
So, if you like the functionality of your wrap account and the investment portfolio within, you will most likely be stuck paying the annual fees of the adviser that set it up for you.
Underperformance
Although not directly related to wrap platforms, it must be said that adviser recommended portfolios do not necessarily outperform the simple options offered through industry funds and ETFs.
The ongoing fee remuneration structure of the financial advice industry incentivises the introduction of complexity for complexities sake. If investments look difficult to manage, then a client is all the more likely to pay an adviser to remove that headache for them.
In reality, simple investment strategies often win, both in performance and ease of management. More about this can be read here: Index Funds vs Active Funds & Should We Feel Sorry for Active Fund Managers?
Fees
This is the elephant in the room. No doubt there are benefits to wrap platforms, but do these outweigh the fees?
For this comparison, four of the largest wrap platforms have been benchmarked against a low-cost industry super fund. This was chosen as it is the most relevant comparison, because investment brokerages do not have any ongoing administration fees.
The investments chosen are a 70/30 mix between an Australian shares index ETF and a global shares index ETF. The industry fund differs in that the investments chosen are their own index options, in the same proportions as before. Three different asset levels have been compared, $100k, $500k and $1m.
Even accounting for the lower investment fee of the ETF’s, the cheapest wrap platform is still over double the cost of the industry fund. Some even three times the cost. This is just for superannuation, where administration fees are always necessary.
Conversely, ETFs held out of super can be invested in with zero annual administration fees through brokerages like Commsec, Stake, CMC, Vanguard etc.
The question is, are the benefits worth the extra cost for you?
It must be said that many advice firms do attract preferred pricing from some particular platforms. Despite this being a massive conflict of interest, it can admittedly reduce the cost of the wrap platform. Although it still won’t come close to the industry super fund.
Add back the requisite adviser fee, and there really isn’t any competition when it comes to fees.
Remaining Justifications
For the person that prefers the simplicity of an index portfolio, there really is very little justification for a wrap platform. The management of such a portfolio is so simple that the tax and reporting capabilities of the platform will be largely underutilised.
The only reasonable justification for a superannuation-based wrap platform that remains is tax efficiency, as mentioned earlier. The problem with this argument is that the potential tax benefits of rolling over capital gains are dependent on many different variables: keeping the same investments the whole time, maintaining the adviser etc. Even with that considered, the tax inefficiency of industry funds cannot be defined accurately.
If this remains a concern, luckily other solutions exist that also solve this problem. Solutions that conveniently don’t involve an adviser.
Self-managed super funds naturally solve the tax issue and can be managed for relatively low costs these days. Often around $1,000 p.a. for simple funds, which can become very cost effective at higher balances. Although this isn’t a solution for everyone as there are other complexities involved.
Luckily there is one last solution, the direct investment product offered through many industry super funds. These products were already covered by this article: The Tax Problem with Industry Super Funds. These products allow for capital gains to be transferred into pension phase, just like wrap platforms.
How do the fees stack up against the wraps, using the exact same ETFs?
These products can be considerably less expensive than wrap platforms and even competitive with standard industry fund offerings at higher balances. All the while benefiting from the potential tax benefits of direct ownership.
Summary
It is no surprise the popularity of wrap platforms amongst advisers. Without them, managing portfolios for clients becomes incredibly difficult, if not impossible in practice. And without the ability to manage a portfolio, there would be little basis for charging an ongoing fee based upon the amount of assets the client has invested.
Wrap platforms are essential for the remuneration structure of the advice industry. The benefits touted are simply secondary justifications for their widespread use. The question is whether they would continue to be used with such popularity if advice fees were not able to be deducted directly from the portfolio.
The answer is a resounding no. The cost to benefit ratio is questionable even at the highest balances.
The only seemingly justifiable circumstance for their use would be for those who want a complex portfolio filled with funds that cannot be accessed through standard super funds or brokerages. Or perhaps a portfolio with so many individual funds that the consolidated tax reporting saves considerable time.
Does the average person really need such a setup though? Data tells us that the vast majority of active funds underperform their benchmark. Without an adviser pushing these types of portfolios, it’s unlikely people would naturally gravitate toward them in the first place.
If a wrap platform’s only benefit is that it allows you to access actively managed funds that on average underperform, then that’s hardly a benefit worth paying double the fees for.
