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News Bulletin : ADA News Bulletin February 2011
40 FEBRUARY 2011 • How do you access the WRAP account? -- Does the platform require access to the WRAP account via an adviser? If so, entry fees may apply on any new money added until 1 July 2012 as well as high percentage based adviser service fees. Make sure access to the platform is either direct or there is the option of transferring to another platform without incurring capital gains tax. Transfers can be achieved in many cases via an in specie transfer (covered later in this article). Transferring assets in specie means you can transfer your underlying investments without having to sell them and incur capital gains tax. • Advice is important -- Investing, particularly in superannuation, is a complex area and accessing professional advice is invaluable. You may need advice to assist in creating an investment strategy and to undertake periodic reviews of your portfolio. However, how you access and pay for advice can make a big difference in your returns. Pay only an hourly professional fee for advice and avoid percentage based adviser service fees as they effectively reduce the performance of your investments. However, using an adviser should not be a requirement of being able to place and monitor investments and investors should be able to access WRAP accounts with the option of using an adviser. • Avoid 'nil entry fee' or deferred entry fee options -- Some WRAP accounts offering 'nil entry fees' or deferred entry fees options are to be avoided as they often come with a nasty sting in the tail in the form of higher annual management fees. • Upfront commissions are optional -- Some investors still pay up to 5% commission when placing investments. Smart investors negotiate to pay flat dollar fees for advice and have the upfront fees waived or at least reduced or choose to use a platform that allows direct access. • Consider potential conflicts of interest and compare available options -- Not all WRAP accounts are created equal. With nearly 70% of advisers linked to institutions there is a tendency to offer only an employer owned WRAP account. Ask your adviser to explain the number of WRAP account options available and carefully compare the fees and charges. Better still execute your own investment transactions in a WRAP account that you can access directly and pay for advice separately. • Consider the cost of trading shares in a WRAP account -- Most WRAP accounts allow access to shares but the value for money aspect needs to be considered. Purchasing shares in a WRAP account incurs administration fees on the share portfolio. If you have a significant share portfolio you need to determine if the tax reporting and ease of administration is 'value for money'. Alternatively, share transactions can be executed through a discount share broker and maintain your own tax records. Remember that the reduced administration fees on larger balances could result in lower fees on the direct share portion of your portfolio if you also have significant managed funds investments. • Compare different badged versions of the same product -- Most operators of WRAP accounts allow adviser dealer groups to create their own 'brand' or white labelled version of a WRAP account with their own pricing. Therefore, not all badged versions of the same product have identical fees and charges. The fee structure for a badged WRAP account is often determined by the selling organisation and can differ dramatically. Some products require the use of an adviser and this can increase the costs dramatically among groups. You are free to pay someone to transact your investment decisions but you need to be aware of the effect of the fees on your returns. HOW DO I GO ABOUT CHANGING WRAP ACCOUNT PROVIDERS AND REDUCE MY ANNUAL FEES? This is the question I am most often asked. Most investment WRAP accounts are custodial services and you can in specie transfer from one WRAP account to another which means holdings can be transferred without incurring capital gains tax as the ownership remains unchanged. Compare the lists of available investment options to ensure that the funds you have are eligible for transfer into the new platform. You are also responsible for providing accurate cost basis information to the new WRAP account to ensure accurate tax reports. Sometimes when transferring to another badged version of the same WRAP platform the transfer can be completed very easily as the operator already has all of the required information. For example, if you invested in Asgard eWRAP through an adviser you could easily migrate to the Personal Choice eWRAP product because the investment lists are almost identical and the process relatively straight forward. Asgard is one of the few providers that allow investors in their older expensive products (Asgard Master Trust and Asgard Elements) to transfer to Personal Choice eWRAP without incurring capital gains tax. This also applies to Asgard Super and Pension products when transferring to Personal Choice Super/Pension. For superannuation WRAP accounts with other providers an 'in specie transfer' is not available as the assets in a super fund are owned by the Trustee of the fund so you will need to sell the investments in one platform and buy them in the new account. You need to consider the costs of doing this against the potential savings. I hope this article has enlightened you as to the advantages and disadvantages of WRAP accounts. If you have an existing WRAP account, talk to your adviser about establishing a professional dollar based fee for advice and eliminate any percentage based adviser service fees. Alternatively, if you are considering investing in a WRAP account or already have one consider changing or choosing one that lets you control the transactions so you can pay for advice separately when it is needed. Fees really do matter and each dollar of fees comes straight off your return. A saving of 1% per annum (no adviser services fee) over a 25 year investment horizon on a $300,000 balance could result in total savings of over $470,000*. By separating your advice from your WRAP account you will benefit from these savings. Consider this fact when you think that changing now is all too hard. Next month, I will compare the costs of setting up your own self managed super fund versus using a superannuation WRAP account as an alternative. The information contained in this article is believed to be accurate. To the maximum extent permitted by the law, 2020 DIRECTINVEST (AFSL 244 249) disclaims liability for errors in, or omissions from, this article. In no way should this article be construed as providing securities advice or an endorsement or recommendation of any security or product. In preparing this article we have not taken into consideration your investment objectives or your investment needs and make no representation as to the suitability or otherwise of any product, or security, to you. Before making any investment decision or purchase you should fully satisfy yourself as to the suitability of any security or product you are considering, to your own particular circumstances, and if necessary seek professional fee-based investment and tax advice. Michael Lannon is the Executive Director of 2020 DIRECTINVEST, an ADA Partner service specialising in the provision of execution only DIY investment services. For more information or any questions please contact Michael Lannon on 1800 352 021 or visit 2020's website www.2020DIRECTINVEST.com.au *Assumes an annual return of 9.0% versus 8.0% with 1.0% adviser service fee. investment insight
ADA News Bulletin December 2010
ADA News Bulletin March 2011