Wrap account investment products and how they work podcast

  • Gareth LaneGareth Lane Ashwin RamdasAshwin Ramdas Sonny RahimSonny Rahim
  • Updated Dec 19, 2022

  • Mate Checked

    This information has been reviewed by our SMSF Mates before it was published as part of our review process.

Wrap account investment products and how they work Podcast Transcript

Welcome to SMSF Mate. Our general advice warning. We are required to warn you that any advice has been prepared without taking into account your objectives, financial situations or needs and because of that you should before acting on any advice consider the appropriateness of the advice having regard to your own objectives, financial services and needs. Where the advice relates to the acquisition or possible acquisition of a particular financial product you should obtain a product disclosure statement relating to that product and consider the PDS before making any decision about whether to acquire the product. Now let’s get into it.

Gareth: Hello and welcome to today’s SMSF Mate podcast. Today we are going to be talking about the word Wrap. It is not something you get at a fast food restaurant. My name is Gareth and with me I have…

Ashwin: Ashwin.

Sonny: Sonny.

Gareth: What is a wrap?

Sonny: And Tim whose mic’s not working.

Gareth: Yes and Tim’s whose mic’s not working. Wraps for lunch.

Sonny: Wrap, investment wrap, investment platform. It’s basically an electronic, web-based platform that can consolidate investment and reporting.

Gareth: Do I need a wrap?

Sonny: If you want to access particular investments that have minimum investable amounts. If you’re thinking about, a good example direct share investment on the ASX. In order to buy and sell you need a trading account.

Gareth: Right. One of those.

Sonny: One of those. In order to then buy unlisted managed funds.

Gareth: Unlisted managed funds right.

Sonny: You need a platform or a wrap account to be able to buy and sell and transact.

Gareth: Where do I get a wrap account?

Sonny: From a wrap provider. There’s a number of companies out there typically the retail market accesses wraps or investment platforms through financial advisors.

Gareth: I’m the individual, the investor. I go to a financial advisor. They then have access to wrap products.

Sonny: Correct so for example historically we’ve used a particular wrap service by a large name bank who then has 3000 different plus unlisted managed funds and products on the wrap.

Gareth: That I couldn’t get normally.

Sonny: That you couldn’t get or people off the street maybe couldn’t get because the minimum investment into those funds are too prohibitive. For example a minimum investment might be a million dollars into a fund. What the wrap does is effectively consolidate investment from a number of investors to hit those levels that then allow investment in the fund.

Gareth: Right interesting. If I fire up my share trading platform account with my major bank I would not be able to find that product in that place.

Sonny: Correct. It’s a trading account for unlisted managed funds predominantly.

Gareth: Does the wrap stand for anything? Is it an acronym for something or is it just a code name?

Sonny: I don’t know. I’ve always approached it as a wrap as in it wraps and consolidates.

Gareth: Like a big bucket basically.

Sonny: Yes.

Gareth: If I go to my financial advisor and say I’d like a wrap please. Is that the right terminology?

Sonny: Investment platform, wrap platform.

Gareth: I’ve heard about these things called wrap. Can you tell me what sort of products we can get access to if we go through a wrap? That’s the lingo.

Sonny: Ashwin’s probably better to talk about this but there’s the advent of newer platforms and wraps now that are more business to consumer than they are business to business in terms of not from a bank to a financial advisor but a bank or a business to now a direct consumer.

Gareth: So it’s not an ETF.

Sonny: No.

Ashwin: The unlisted funds but you’ll find some of the new platforms which might have traditionally fees don’t have access to those things so you still probably need to touch base with an advisor to have opportunities given to you through that space.

Gareth: For example if I used an ET which you can buy and sell on the stock market to get access to an oil fund, a wrap in the same kind of way as our ETF works allows a financial advisor to put together a number of investors together to then buy a stake in an oil fund.

Ashwin: Kind of.

Gareth: The kind of the analogy is kind of there. Different purpose.

Sonny: In different senses. To simplify if you think about a trading account you can only buy typically listed investments. Listed on the exchange.

Gareth: Listed being on the stock market.

Sonny: That’s right. On a wrap account or investment platform you can buy and trade listed investments.

Gareth: Stocks and shares.

Sonny: Correct and unlisted investments which are predominantly unlisted managed funds.

Gareth: Example. I own 10 million worth of property in Osmond Park in Perth and that could be a fund that would be unlisted that I could get through a wrap in theory.

Sonny: If you then went through the process of getting your fund onto the platform licensed and structured in the appropriate way for it then to be distributed via the platform and wraps. Platform and wrap let’s use that interchangeably. Not all unlisted managed funds are going to be available on wraps either scale, size, investment mandate, being approved by the wrap or investment platform provider. All of that needs to happen before. In a previous podcast we talked about managed funds that might be wholesale. There’s a lot of wholesale managed funds that are in the early stages that won’t go through the process for size, rigmarole compliance to get onto a wrap because a wrap provides additional distribution to retail and wholesale investors.

Ashwin: Would another hurdle potentially be that that let’s say that product is approved by the wrap that you’re part of it might not be part of your product listing as well?

Sonny: Correct. Even though I mentioned a particular bank’s investment platform has access to over 3000 different unlisted managed funds, the advisors who are out client facing, providing advice and making investment recommendations may have a limited subset of what’s approved on their approved product list in order to recommend those investments to particular clients.

Gareth: You take your 3000 bucket but only 500 of those 3000 are going to be available.

Ashwin: It might be less than that. Might be 10.

Gareth: Then the financial advisor they might have their preference and say well now, I only want these five. What you’re effectively saying is there are a lot more investment opportunities that exist that you may not see on the outside view.

Sonny: Yes.

Tim: How are you charged as an investor of a product on a wrap? How do I pay fees and how does that work itself out?

Sonny: On wraps or the investment platforms themselves there’s something called administration fees. They’re the fees that the wrap provider charges in order to administer and provide access to the magnitude of investments on their product list effectively.

Gareth: What sort of fees are you looking at?

Sonny: It ranges based on the platform. You can have fees that are negligible. We’re talking…

Gareth: Cents in the dollar type thing.

Sonny: Yes or low percentage points or basis points. You might get admin fees that are fixed dollar amounts on certain accounts as well which might be a flat dollar amount. You get admin fees that are charged as a percentage for example a scaled fee for up 50 basis points as an example. 0.5 of the value of your investment gets charged as an administration fee for holding it on the wrap. A wrap allows you and provides you access to trade those unlisted investments and it also provides you the ability to report and consolidate reporting. It also does the tax reporting which is relevant for people that run self-managed super funds. There’s a lot of self-managed super funds that use wraps.

Gareth: That’s a good question.

Sonny: You can do consolidated reporting and tax reporting on all the investments. You could have a portfolio of how many 50 plus unlisted managed funds in your self-managed super fund.

Tim: I guess to qualify as a product on a wrap there is quite a high hurdle to be approved. Would that be true? You have to go through a lot of compliance.

Ashwin: You need a big bank or big institution to check you out I think that would be a fair level of compliance required. Then probably also have to go through the advisors who will select certain ones they want on or could have on their product listing depending on the fees and exposure and other things like that. It would be fairly hard to get through all those processes. There’s no guarantee but I would say when you’re looking at this sort of my personal view is you’d find an independent advisor. Someone that’s not lined up with an institution where maybe the way they’ve streamlined the process to get on the product listing is it’s already gone through their institution or it’s part of their institution when maybe you want a holistic view and get someone that’s actually checking more detailed view over those 3000 approved products but that’s the way I would look at it.

Sonny: I’ll preface by saying that I wouldn’t say that unlisted managed funds on a platform are particularly any better than unlisted managed funds that aren’t but there are hurdles compliance, cost, size and inflow of investment. There’s benchmarking. There’s ratings required typically to get onto a platform. Once a fund manages on a platform it opens up broader distribution opportunities to not only to additional wholesale clients but retail clients as well. A little bit like we’ve talked in the previous podcasts around retail and wholesale there’s an additional overlay of compliance and checks and balances when you’re on a wrap as well but again just because that’s there it doesn’t mean that the underlying performance or investment thesis of the fund manager is any better than a fund that’s not on a wrap platform.

Tim: Because in my experience in that distribution space working for young funds or listed funds or whatever it’s often the case where the manager thinks okay, we’ll try and raise a certain amount of money, perform really well for five years and then hopefully we can apply to become a wrap product. Then the sales people’s jobs become a lot easier pretty much.

Sonny: I think that’s a key point that distribution really opens up. If you think about a fund manager who will try and distribute their product not on a wrap they’ve got to do that directly. They’re going ‘fund to investor’. Once you’re on a wrap because that wrap aggregates a whole lot of investment and investors and are used by typically a lot of advisors there’s a consolidation of a huge distribution channel.

Gareth: In theory, it’s more efficient which usually means it’s more cost-effective.

Tim: I mean to your point Sonny like we used to do seminars to SMSF trustees. We might have 100 people in a room and they would all be wholesale investors. The minimum investment in this particular fund was a million dollars. You get a couple and that’s great but on the flip side if you’re on a wrap you might just receive an allocation from an advisor or a group. That allocation could be…

Gareth: 100 million dollars.

Tim: Exactly and you go oh sweet.

Gareth: Job done. No need to take out a function centre and put on food and drinks and answer stupid questions.

Sonny: Which is important for fund managers too so they can spend their time focusing on managing the investment rather than out selling but to your point earlier Ashwin there are also strategies that have constraints around size and ability.

Gareth: Sounds like wraps are good.

Sonny: Wraps are good. You got to be mindful as well. There are a lot of advisors that will just put clients into a wrap and we’re focused on self-managed super funds here. They might put a client into a wrap to get particular distribution and that wrap might be paying higher admin fees and other options or that it should. That might be because it’s the only one available to that particular advice group. There are broader wrap products out there and there’s a highly competitive space now in terms of administration fees for wrap platforms but getting into another conversation and maybe a different time for a different podcast.

You asked what are the fees. The other fees Tim are obviously then the management expense ratios paid to the investment managers or the fund managers and the products that you’ve actually invested in via those wraps. Two key costs are obviously admin fees to access and report on those investments and the other fee is the management expense fee paid to the investment manager to actually manage the investment.

Ashwin: I suppose another good point of contact is the site actually has a list of investments.

Gareth: You mean the smsfmate.com.au website.

Ashwin: That’s a good plug there Gareth. We put together an information piece. Users of the internet should go back and obviously do more research than what we’ve put together because we’ve just compiled what we’ve got access to but you can see performances. You can see sectors. You can see management fees. You can see the costs involved and an overview view and then maybe engage an advisor to make sure.

Sonny: The important thing about fees as well though you’ve got to think about the combination of those admin fees and the management expense ratios as a whole. Always lookout for the disclosure of management expense ratios or fees because they’re typically not cash flowed or paid by the investor. They’re embedded in and reflected in the unit price of the fund itself when you’re buying and selling whereas administration fees on platforms cash flowed or paid by the investor using the platform. You’ll see a dollar amount physically going out of your bank account for an admin fee but a management expense ratio…

Gareth: It could just be taken out of the unit price.

Ashwin: Correct. There’s also a unit performance fee.

Gareth: Hidden fees basically.

Sonny: There’s been a lot of challenges in the past in the industry around disclosure of those fees which is it’s a lot more regulated now but we always encourage people to look at fees from a perspective of what’s cash flowed and what’s not cash flowed and look at the total combination of those. There’s also a theory that the management expense ratios don’t matter as much so long as the performance is there. Would you rather a 10% performance with a 5% fee or a 4% performance with half a percent fee.

Gareth: All relative right?

Ashwin: I suppose the easiest way for any investor to get clarification is you engage the provider or the advisor and ask the question what are the total fees to invest in this product. They will disclose all the information available to you before you invest. It’s important to ask that question because…

Sonny: And they’re required to by law as well.

Ashwin: Yes. That’s the whole purpose of financial advisors in the space is to give clarity to investors.

Thank you for joining us once again. If you’re interested in our waffle about self-managed super funds feel free to join us on smsfmate.com.au or search SMSF Mate in Spotify.

General Advice Warning

Gareth Lane

Concise Digital

Gareth Lane is a successful entrepreneur, businessman, and owner of the digital marketing and web agency Concise Digital, based out of Perth, Western Australia. Concise Digital have solved over 60,000 digital / web problems for clients since 2005. Gareth is one of the founders of SMSF Mate.

Gareth is passionate about helping small businesses be more successful online by avoiding the pitfalls of digital marketing. He regularly runs live talks, workshops and meetups discussing Google, social media and all things digital marketing.

Gareth studied Business and Commerce at Curtin University, and has held board positions for a number of organisations, including serving as the President of the Western Suburbs Business Association and as a non-executive member of WA Business Assist. A true entrepreneur at heart, he started his first business at 13 and has created and run multiple successful businesses since.

Gareth enjoys good food, great wine and time in the sun when he’s not at his computer helping other businesses get ahead!

You can find out more about Gareth or connect with him on Linkedin here: https://www.linkedin.com/in/garethconcise/

Or visit his websites here: https://www.concise.digital/ or https://www.garethlane.com/

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Ashwin Ramdas

Eventum Consulting

Ashwin is an accountant and educator based in Perth, Western Australia. He is passionate about helping family owned businesses and startups. He is one of the founders of SMSF Mate and you’ll regularly see him on our podcast!

Ashwin is a managing owner and director of Eventum Consulting, a multidisciplinary firm helping clients with finance, succession planning and their tax needs. He also served as a lecturer in taxation and small business at the Central Institute of Technology, and has worked as an accountant at a number of well-known tax specialists.

Ashwin studied a Diploma of Business Education and a Bachelor of Commerce in Financial Accounting, Managerial Accounting and Corporate Finance, both at Curtin University, WA.

Ashwin is passionate about technology, and sees it as an enabler for his clients to grow truly sustainable and profitable businesses.

You can find out more about Ashwin or connect with him on Linkedin here: https://www.linkedin.com/in/ashwin-ramdas-72442919/

Or visit his website here: https://eventum.com.au

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Sonny Rahim

Premia Private

Sonny Rahim is a finance professional based out of the Greater Perth Area. He is the director and founder of Premia Private, a multi-faceted finance business with advisory divisions and expertise in the areas of Strategic Planning, Wealth Management, Investment Management, Debt and Personal Insurances. Sonny is one of the founders of SMSF Mate.

Sonny studied in the Private Markets Investment Programme at Saïd Business School, University of Oxford and also participated in the Oxford Entrepreneurship Venture Finance. He also completed a Bachelor’s Degree, Commerce (Accounting and Finance) at Curtin University in Western Australia.

As well as being a founder and managing director of the Premia Financial Group, Sonny has worked as an investment fund manager and a chartered accountant. He sits on the board of Ronald McDonald House Charities Western Australia.

You can find out more about Sonny or connect with him on Linkedin here: https://www.linkedin.com/in/sonny-r-rahim-28959333/

Or visit his website here: http://www.premiaprivate.com.au/

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