Master trusts, and wrap accounts* are administrative services that take investor's money and invest it in a variety of wholesale funds.

Once you put your money into a master trust or wrap account, you will incur an extra layer of fees for the reporting service, however they are to a large extent offset by the much lower MERs of the funds available through the master trust or wrap because often the funds are wholesale funds.

As I've already written in the article on wholesale funds, you need anything from a hundred thousand dollars to many millions of dollars to buy into a wholesale fund. Naturally, if you are going to invest in a dozen wholesale funds you will need some pretty serious cash.

A master trust enables you to diversify your holdings in wholesale funds with a much lower entry fee. Typically $20,000 or so will get you into a full featured master trust, though some require $50,000 or $100,000.

Once inside the master trust, you can switch between funds usually without a fee (capital gains tax is another matter), and put your money into as many funds as you like. Most master trusts have preselected fund-of-funds portfolios, with a suitably diversified holding of a variety of fund managers with different styles. You can go with the preselected portfolio options, or pick your own funds.

Some accounts do charge a switching fee, but the ones I have seen that do this tend to charge much lower fees overall, so a long term investor that doesn't want to trade funds excessively might be better off shopping around for the lowest cost wrap account or master trust you can find and trying to reduce your portfolio turnover.

Master trusts have a list of funds you can go into through them, you won't necessarily find every fund in every master trust. In fact, many master trusts are biased toward providing their dealer's own products and some even charge fund managers for the right to "shelf space".

As well as funds, many master trusts allow you to buy individual stocks. You usually pay a semi-discount rate of $50 a trade or so, though the master trust is not supposed to be a short term trading vehicle. The extra administration and delays make these unsuitable for short term traders, you should be talking to an online discount broker if you want to get in and out of stocks a number of times a week.

The advantage of master trusts is the flexibility to move around and the choice of funds. Although you may be holding a dozen or more funds, your statements will come through showing your dividends and distributions for all funds on a single page. This is very handy for tax time.

Master trusts can be a reasonable alternative to true self-managed super funds. You can manage your money yourself, but are freed of the rather expensive duties of a SMSF trustee. If you want to run your own super, but don't want to pay auditing fees or go through all that trouble with the Tax Office, a superannuation master trust can be a viable alternative. Of course self managed super funds can buy into master trusts if they want to.

If you have less than $100,000 in super, the costs of a master trust usually compare favourably with the costs (auditing and compliance) of a SMSF. For balances above $100,000, auditing fees become relatively insignificant compared to the balance and a SMSF and the costs argument for a master trust is less important, though the convenience argument remains. (Though for the record, since there are master trusts with maximum fees of 0.75%pa, actually unless you want to do something unusual like buy business assets or direct commercial real estate in my opinion there is no compelling reason to use a SMSF unless you have over half a million dollars).

As an independent financial planner, I do have some concerns about the way master trusts are marketed to consumers. I wonder perhaps are the benefits of consolidated reporting somewhat oversold? When you compare a master trust to a retail investment, you usually find that between the wholesale fund MERs and the fees for the master trust that the master trust still comes out a bit more expensive.

"The magic of compounding" is frequently used to demonstrate the long term benefits of compounding interest, but a cynic like myself would be equally apt to refer to "the tyranny of compounding". The tyranny of compounding is that even small increases in costs can greatly diminish your long term gains. If you compound money for 30 years at 10% you'll turn $1 into $17.45, but if you only make 9% you'll only get $13.27, a 30% difference. One day, all that convenience along the way of having a nifty all in one reporting service may well cost you a third of your retirement savings!

I am convinced that the reason why master trusts are being promoted so hard by financial planners is not that they are really such a great product for the customer (er, sorry, client), but they are a wonderful product for saving administrative time and money for financial planners. This is no big secret among financial planners, when I speak to a business development manager for a master trust or wrap account company they almost never point out cost advantages for clients, but always try to make me see the great cost savings to my own business. Although they don't admit it to general members of the public I think it would be fair to say that in private most financial planners would admit that master trusts are more for the adviser than the client.

In my own financial planning practice I consider carefully the merits of a master trust for my clients. First of all I like to use index funds, and it would be silly to use a 1.5%pa master trust service when I could use a 0.3%pa index fund directly, since I use index trackers extensively I minimise the use of master trusts and wraps. Secondly, I have a deliberate policy of keeping transactions to a minimum, to minimise tax and other costs. The great advantage of cost free switching in master trusts is not a big concern to me since I don't do much switching anyway.

So who is best suited to a master trust (other than a financial planner!)?

1. For some levels of funds under management and some funds, the cost of using a master trust or wrap can be less than the cost of using retail funds when there is a big difference between retail and wholesale funds. (Though if you use index funds this reason will never apply).

2. For some clients that are really lazy and want the least complicated investment strategy of all (apart from 100% indexing) the one review document from the master trust can be a boon.

3. You might want to get into some funds that are only available within a master trust and not as a retail product: For example you might want to get into a hedge fund with a minimum investment of $500,000. Unless you have half a million dollars, a master trust really is the only choice you have.

4. People that want to run a self managed super fund but don't have enough money to make it worthwhile with all the audit and setup fees: A decent discretionary master trust has a huge range of funds and shares and thus gives you the opportunity to make a lot of your own investment decisions and do most of what a SMSF trustee can do - but more cheaply and without the bother with compliance matters.

5. Someone wanting to save on insurance: I once saved a client $2,000pa on an income protection policy (over the next cheapest retail policy) by using a group rate policy within a master trust, and as his account balance was only $20,000 I felt that the cost penalties of the master trust were more than compensated for.

* Actually, master trusts and wrap accounts aren't quite the same thing, while they perform the same purpose and do the same thing they have different legal structures. The general description given in this article would apply to both a master trust and a wrap account. It is also true that in general master trusts have higher fees than wrap accounts, though this has nothing to do with the differences between master trusts and wraps and comes from the fact that master trusts are the older product and are more widely marketed to consumers, so they charge more.