Investors call planners to charge performance-based fees

Investors call planners to charge performance-based fees

Thursday, 26 August 2010 11:50am

Performance-based fees have traditionally been the domain of fund managers - but research shows a growing number of investors are urging financial planners to start adopting this fee structure.

Mark Johnston, principal of research firm Investment Trends and speaker at this morning's Rainmaker Marketing Symposium, said an emerging trend among retail clients is their preference for advisers to charge performance-based fees, rather than a commission or asset-based model.

"About 19 per cent of investors say their preferred model for paying an adviser is performance-based fee."

"That's one area that has a little bit of differentiation, [in that] advisers try and convince their clients that an asset-based fee for service [model] is really like a performance-based fee anyway," he said.

Calls for changes in adviser remuneration also go along with increasing client dissatisfaction with fee levels.

Around 40 per cent of investors expect to pay lower advice fees following the dent to their portfolios in the wake of the GFC.

And while discussions continue to swirl around fees for service versus commissions, with the government proposals to ban commissions by July 2012, the difference of fees charged for both models can sometimes be negligible.

"Above a certain threshold of assets ... the actual advice fees, not counting the product and administration fees, is almost always about 70 to 80 basis points on average.

"That's actually true regardless of how it's collected. You'll find that 70 to 80 basis points come through whether it's an asset-based fee, fee for service or commission model," he said.

Johnston said the renewed focus on low-cost investing has accelerated demand for exchange traded funds (ETFs), direct shares and separately managed accounts (SMAs).

More planners bypass managed funds: study

More planners bypass managed funds: study

Tuesday, 17 August 2010 1:10pm

Fund managers are put on notice in a recent investment study that found a growing number of planners are placing their clients' funds into direct shares, ETFs, REITs and SMAs, leaving only a fraction of inflows into traditional managed funds.

The survey pooled the views of over 700 planners in April and May this year, a small sample when compared to the 18,000-plus financial planners in Australia. However, their collective insight still gives some indication on where new money is flowing post-GFC.

The Investment Trends research found that more than two thirds of all planners now advise on direct shares, and this group expect their allocation to direct equities to rise from 23 per cent of their funds under advice (FUA) today to 34 per cent by 2013.

Mark Johnston, principal of the firm said that the move to offer direct equities started in 2008, but the combination of poor returns from some managed funds and lower costs of non-managed fund alternatives, have accelerated the trend.

"Direct equities spiked to 20 per cent of new inflows invested for clients, with growth also seen in the proportion going into ETFs, REITs and SMAs," he said.

This meant inflows into unlisted managed funds dropped from 62 per cent to 50 per cent compared to the year before.

"This is a massive shift in planner behaviour," he said.

According to the research, the planners that poured more than half of their recent client inflows into direct listed investments only invested 7 per cent into managed funds.

Johnston said that direct equities, once the domain of stockbrokers, is now a core part of a planner offering. Planners currently advising on direct shares expect to increase the proportion of their clients using this advice to grow from 30 per cent to 43 per cent over the next three years.

But it's not all bad news. Practically all the major fund managers in the country offer planners 'model portfolios', which are exactly the same portfolios they run except they're not managed within a unit trust structure. Planners pay them fees for their 'intellectual property' and, in return for lower fees, the fund manager does not have to do all the admin-related duties attached to these model portfolios.

Planners flock to direct equities

Planners flock to direct equities

Driven by client demand

Victoria Papandrea

By Victoria Papandrea
Tue 17 Aug 2010

Advisers are increasingly turning to direct equity investments for new client funds, according to an Investment Trends report.

Financial planners are increasingly turning to direct equity investments for new client funds, according to the latest report from Investment Trends.

The research, which was based on a survey of over 700 financial planners in April and May 2010, revealed a surge in direct equity investments driven by client demand.

Direct equities spiked to 20 per cent of new inflows invested for clients, with growth also seen in the proportion going into exchange traded funds (ETFs), real estate investment trusts (REITs) and separately managed accounts (SMAs).

"Planners have been gradually increasing their use of direct shares and other listed investments since 2008. But this year has seen a dramatically larger shift," Investment Trends principal Mark Johnston said.

The survey indicated that just half of recent inflows were directed to unlisted managed funds, down from 62 per cent the year before.

"This is a massive shift in planner behaviour," Johnston said. "Planners estimated just 39 per cent of inflows would be directed to unlisted managed funds by 2013.

"Two thirds of all planners now advise on direct shares, and this group expect their allocation to direct equities to rise from 23 per cent of FUA [funds under advice] now to 34 per cent by 2013."

The research indicated a third of planners placed more than half of recent client inflows into direct listed investments broadly, which included shares, hybrids, ETFs, REITs, SMAs, and listed investment companies.

"Planners in this high usage segment placed just 7 per cent of recent inflows in managed funds", Johnston said.

"That appears in part to be a response to the increased investor fee aversion, and dissatisfaction with managed fund performance identified by our research. Client demand was a major catalyst for higher direct equities use."

The survey also found the number of planners advising clients on direct shares is also on the rise; two-thirds of planners currently advising on direct shares intend to continue doing so, while another 10 per cent of planners expect to begin over the next three years.