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News Bulletin : ADA News Bulletin February 2011
38 FEBRUARY 2011 Compiled by Michael Lannon investment insight If you only read one of my columns in 2011, make it this one, as it will explain how to save thousands of dollars in unnecessary fees. In this article, some of the most popular investment administration platforms (WRAP accounts) will be reviewed, comparing their fees and showing you how to eliminate unnecessary fees. However, superannuation and pension versions of these WRAP accounts are also available. If, like me, you made a New Year's resolution to pay more attention to your finances then the first step is to understand your options and evaluate the fees and charges associated with your investments and superannuation. During 2010, the markets staged a recovery with the Australian market as measured by the S&P/ASX 200 Accumulation Index returning 1.6%. The MSCI which measured the performance of global markets returned 11.8% but the strong appreciation of the Australian dollar reduced this to --1.9% for Australian investors. The strong returns in the last bull market masked the high fees associated with adviser driven WRAP accounts but the GFC has shone a spotlight on commissions and the government is proposing new legislation that will eliminate commissions from investment products as of 1 July 2012. WRAP accounts have many advantages but how you access them is vitally important. Paying upfront commissions and high ongoing percentage based adviser fees make WRAP accounts very expensive which offsets those advantages. Paying total fees of 2.5--3.5% each year when you are losing money or earning single digit returns is ludicrous. Recommendations by financial planners usually involve using a WRAP account or investment platform to administer investments. The popularity of WRAP accounts has exploded with more than 75% of new investments going into a form of investment platform. Using the wrong WRAP account can prove expensive if you are not careful to avoid unnecessary fees. As always, I recommend separating your advice regarding strategy from the execution of transactions and paying a dollar based (hourly fee) for your advice rather than a percentage based fee. Therefore, it is important to use a WRAP account that allows you to transact whether or not you have an adviser as this gives you the independence required to negotiate the best fee for service advice deal. Advantages of WRAP accounts include: • Consolidate all investments in one place -- WRAP accounts allow access to managed funds, shares, cash and margin lending and provide online access to view reports on consolidated holdings at any time. A single consolidated tax report is provided each year which saves on accounting fees. • Diversification -- All available investment choices allows the creation of a diversified portfolio across asset classes thus reducing risk. • Access to wholesale funds -- Many wholesale funds as well as 'boutique funds' are not available to retail investors as the minimum investments range from $500,000 to several million. WRAP accounts can pool investors money to allow access to these funds. • Simple switching -- once a WRAP account is opened buying and selling managed funds can easily be undertaken without completing a new application form every time. • Tax deductibility of fees -- Some platforms administration fees may be tax deductible. A WRAP account revolves around a central cash account. These can be online bank accounts, cash management trusts or a full featured bank account with a cheque book facility. Usually, investors are required to maintain a minimum cash account balance to pay their administration fees. Typically, this is $1,000- $5,000 as a minimum and buy transactions for shares and managed funds can only be executed if the cash is available in the cash facility. Like all investment products the fee structure of a WRAP account is of critical importance. Investing in some platforms can be more expensive than just buying a comparable retail fund but establishing exactly what fees you are paying can be a challenge. Fees associated with WRAP accounts can be broken down into the following categories: • Account administration fees -- WRAP accounts administration fees are charged by the platform operator. Most platforms charge on a tiered basis with administration fees declining as HOW TO CHOOSE THE BEST WRAP ACCOUNT and eliminate unnecessary adviser fees www.2020directinvest.com.au/ada | 1800 352 021 100% entry fee rebate on managed funds
ADA News Bulletin December 2010
ADA News Bulletin March 2011