Money: Winning the paper war

By PHILP MACALISTER

A perennial problem for people who have a range of investments is how to avoid the paper war.

If you have ever owned a bunch of shares you will know what it is like to have your letterbox jammed with annual reports, half-yearly reports, dividend payments and other correspondence from the company.

On top of that you have to keep track of each share's performance, and at the end of the year you will have to tot up all the advice notices to calculate how many imputation credits you can use in your tax return.

An easy answer is to use a professionally managed share fund.

The manager will make all the buying and selling decisions and at the end for the year you get one consolidated statement of performance and a tax return.

The problem gets more complex when you start owning other assets such as property and bonds.

Again an easy answer, particularly for the small investor wanting to avoid hassle, is to buy a balanced managed fund.

The solution for the more sophisticated investor is the portfolio administration service, which comes in two main forms - master funds and wrap accounts - and has, until now, been available only through financial planners and investment advisers.

The birth and growth of these services has been one of the biggest investment trends in the past few years. Now the field is about to get bigger and easier to access with new services from two of the country's big financial services companies, Tower and AMP.

Tower Managed Funds recently launched its Portfolio One service master trust and AMP has a new offering called InvestorNet.

Although there are two main types of administration services, their aims are similar.

That is, they consolidate all investments under one umbrella, meaning you get one statement instead of a constant stream of paper.

The popularity of these services has been driven by advisers, who have been looking for ways to tidy up their back office and build a business which provides them with regular monitoring fees.

In the early days of financial planning, they made their money through commissions for selling funds.

Upfront commissions are still available, but many advisers now use administration services to provide clients with regular monitoring reports.

The big advantages of portfolio administration services are that they nuke the paper and allow advisers to spend more time with their clients.

But they do have their critics.

Actuary Michael Chamberlain says the two main concerns relate to fees and disclosure.

In a retail service, an investor could be paying up to 3 per cent annually in fees. A service will charge between 0.5 per cent and 1 per cent annually for monitoring a portfolio and the balance of the fees goes to managers, trustees and the administrator for fund running costs.

Mr Chamberlain says fees at this level make a significant dent in an investor's overall returns. His concern about the impact is heightened by the view that overall portfolio returns will begin to fall as world economic growth slows.

"These are very high compared to long-term expected returns."

His calculations based on 15 financial products show that in some cases fees can halve the net return.

The returns in a portfolio with a 7 per cent annual gross return over a five-year period would be expected to provide a net return of 4.69 per cent a year. In the worst case, fees would reduce the net 4.69 per cent annual return to 1.6 per cent and in the best case scenario the return would fall to 4.38 per cent.

He also criticises the level of disclosure within some of the services, saying that they are not subject to the same level of scrutiny or market disclosure as other investment products.

The issue is that relevant information, particularly about the total fees being charged, is hard to find.

The next wave of portfolio administration services has already hit our shores, thanks to the internet, and they are changing the relationship between investors and advisers.

The first and most basic of these is the portfolio monitoring services offered by online share traders. These started off as relatively simple functions but now include facilities where the sites will e-mail news and price alerts automatically.

Currently these services relate to direct shares (in New Zealand and some cases Australia) and not to managed funds. One site which does include managed funds is MoneyOnline.

AMP is due to take its InvestorNet wrap account offering online directly to the public next week. InvestorNet has the potential to be a wrap service and include a wide range of securities. In its current form it offers investors access to nine UK-based unit trusts and the New Zealand-domiciled international index fund WiNZ.

When it goes public, investors will be able to buy and sell any of these 10 funds and monitor their portfolio.

AMP Financial Services spokesman Andy King says the internet gives both the adviser and the customer the tools for improved portfolio management.

While the internet allows the customer to take a more proactive role, Mr King doubts it will replace advisers.

He says investors should see their adviser to make sure they have the right investments for their risk profile and investment horizon before using these online administration tools.

The next development, after direct access to master trusts and wrap accounts, will be added services such as share trading.

Then comes the screen scrapper, where you will be able to visit one website and do all your financial transactions online, from banking through to bill payment and investing. The rates will probably be lower than those for the master trusts and wrap accounts currently on the market.

* Philip Macalister is the editor of online money management magazine Good Returns. Good Returns provides news on managed funds, mortgages, insurance, superannuation and financial planning.