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If you’ve ever invested through an adviser, chances are they mentioned platforms or wraps. If you dozed off at that point, who could blame you.
But if a small part of you would like to know what they were talking about, read on. After all, it’s your money that’s about to leave the station.
What’s a platform?
An investment platform is an administration service that offers an extensive menu of investments wrapped up in a single account.
Platforms have been around for decades but have evolved to offer greater individual control as technology has developed.
- In the early days, master trusts were the go-to platforms. These only offer investments in managed funds and all your money is pooled with other investors. Investments are held in the name of the trustee, with all income, tax and franking credits attributed to the fund before being apportioned equally to each investor via the unit price and paid out as a distribution. Franking credits are also incorporated in the unit price of your investment. The underlying investments are not portable, so if you want to leave the platform you’ll have to sell and possibly trigger a capital gain you’ll be taxed on.
- The next innovation was wrap accounts, which are still popular. These offer shares and other direct investments as well as managed funds. They’re still operated by a trustee, but there’s a higher degree of personal control. Fees and taxes are unbundled from the unit price and disclosed separately. Your income, expenses and franking credits all go through your individual cash account within the wrap. Super wraps are wraps designed to comply with super rules. Assets are portable so you can change wrap services.
- The new kid on the block is the separately managed account, (SMA). These platforms offer investors even more control and the ability to customise. Instead of investing in managed funds where your money is pooled with all the other investors in the fund, you can choose from model portfolios selected by the fund manager. You have direct beneficial ownership of the shares in the model portfolio, which allows you to manage tax to suit your circumstances and the potential to increase after-tax returns.
Investment Trends’ 2018 Platform Benchmarking & Competitive Analysis Report found that 16 of the platforms it studied provide access to SMAs. It also found that 35% of financial advisers now recommend SMAs to their clients.
Who offers them?
Almost all, if not all, financial advisers use platforms to reduce administration. But it’s also the case that many advisers are owned by the financial institutions who provide the platforms.
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Many of the established platforms such as BT, CFS and Macquarie are offered by major banks. But they’ve been joined in recent years by specialist providers such as Netwealth, HUB24 and OneVue. All these, except Macquarie, appeared in Investment Trends’ latest top five for platform functionality.
All retail super funds use platforms, as do a growing number of industry funds which allow members to invest directly in listed investments, term deposits and cash.
What are the benefits?
The potential benefits of platforms are:
- Investment choice. Depending on the platform, you typically have access to ASX-listed securities, margin lending, more managed funds than you could ever want, a wide range of term deposits and cash facilities. Often there is access to investments not normally available to individual investors. About the only thing you can’t get on a platform is direct residential or commercial property.
- Simplicity and efficiency. Platforms gather your investments in one place. At the end of the year you receive one statement with all the paperwork, corporate actions, tax treatments and cash flows covered. You also receive regular updates and online access to your portfolio.
- Access to investments that would normally be outside your reach. Wholesale and specialist funds often have a high minimum investment of $500,000. You may be able to invest via a platform for a much lower upfront amount and take advantage of the lower fees for wholesale investments.
- In some ways, platforms are like a SMSF without the legal and administrative hassle. You can choose your investments, typically with the guidance of your adviser, and pursue your personal investment strategy.
What’s the downside?
In theory, platforms could reduce overall fees, but pricing can be complex and multi-layered. Fees may include administration fees, fees for moving money in and out, management fees for investment options, and service fees.
Since the banking royal commission, the spotlight has been on fees with many platform providers lowering costs to stay competitive. Even so, you need to understand what you are paying for. If you only want a small number of investments, it may be more cost-effective to buy the individual funds or shares and cut out the middlemen.
Who needs them?
Platforms have been forced to innovate over the last decade in response to the rising popularity of SMSFs.
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SMSF investors are often driven by the desire to control their own destiny. Many show a preference for direct shares and listed funds.
The ASX has tapped into this by developing listed mFunds, which connect fund managers with individual investors who are comfortable with buying and selling on their own account. Exchange traded funds (ETFs) and listed investment companies (LICs) are also increasingly popular with SMSFs.
But if you would rather spend your retirement travelling, playing golf or just about anything other than poring over trust deeds, then platforms may be attractive.
Platforms are potentially more cost effective than SMSFs for investors with a relatively low account balance. This is because SMSFs have high annual fixed costs for accounting, reporting and administration.
Conversely, for people with higher account balances, SMSFs may be more cost effective because super wraps often have an administration fee based on asset size.
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