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.

Direct Equities

HNW investors to favour direct equities

Advisers focus resources on shares

Victoria Papandrea

By Victoria Papandrea
Tue 16 Jun 2009

High net worth investors are likely to have the strongest product demand for shares over the next two years.

Australia's high net worth (HNW) investors will have the majority of their money invested in direct equities over the next two years, according to a new survey by Datamonitor.

HNW investors are expected to have up to a quarter of their total investment portfolio in shares by 2011, the survey found.

Wealth managers servicing the financial needs of HNW individuals expect more than 90 per cent of their clients will demand direct equity investments over the period.

While many investors have lost money in shares over the last 18 months, the demand for equities from HNW clients is set to increase as signs of a market recovery begin to emerge, Datamonitor wealth analyst David Lalich said.

"If the stock market continues to rally this year we should see a wave of new investment from HNW individuals, and while many will have learnt lessons from the equity crash, ultimately this will not discourage them," he said.

"These are typically opportunistic individuals that want exposure to the best opportunities for growth in the market."

With client demand expected to be so strong in the area of direct equities, the survey found 44 per cent of wealth managers expect to focus their resources into these investment products over the next two years.

A smaller percentage of wealth managers surveyed said they would focus on developing other investment areas such as property funds, capital-protected funds, exchange-traded funds and currency trading.

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Financial Planners Facing Crisis of Confidence

Financial planners need to decide if now is the time to face their industry’s poor perception, according to the Australian Securities and Investments Commission (ASIC) senior executive leader, financial advisers, Deborah Koromilas.

Speaking at a Financial Planning Association (FPA) update, Koromilas acknowledged that the planner has become linked to the performance of the investment.

The industry is being hit by a perception that “you’re all bad, you’re all crooked and you all have conflicts of interest”, Koromilas said.

The industry needs to question how much of an influence that conflict should have, Koromilas said.

“How much do you want that to affect the entire industry as a whole?”

She also questioned whether there was more of a focus on obtaining good performance at the expense of good advice.

“Was advice just given off the back of a rising market? Should there be more products collapsing. Will the industry survive?”

Koromilas painted the picture of an industry where it was too hard to get new clients and too hard to retain them.

Financial Planners Feel Under Attack

Planners feel under attack

29 April 2009 | by Amal Awad and Lucinda Beaman

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Some financial planners are feeling increasingly despondent, and some are feeling let down by their dealer groups and the industry in general – a situation which is leading planners to reassess their business models.

Wealth Insights managing director Vanessa McMahon said her latest research shows that planner sentiment has fallen to new lows, with 38 per cent of planners having a negative outlook compared to 12 per cent last year. This is on the back of most practices reporting a “serious drop in revenue and profit”, McMahon said.

“Some are running at a loss, and most smaller practices don’t have much fat to cut out of their businesses but have the same expenses, including dealer group costs."

At the same time, some financial planners are expressing disappointment with dealer groups, feeling that they are not receiving additional help, McMahon said.

McMahon said planners are “doing it tough”, facing the pressures of lost income, dealing with clients who have lost money and a sense of being over-regulated. Some planners also feel they have no back-up from the industry and feel under attack, McMahon said.

Financial Planning Association chief Jo-Anne Bloch said adviser sentiment in the US is also very low, while countries such as Japan and Ireland face serious problems.

“If you think things are bad here, [it’s nothing] compared to what's happening around the world,” Bloch said.

“Our research is echoing what Vanessa McMahon is saying: [there is] real anxiety among our membership,” Bloch said.

“There are some real issues and certainly we need to acknowledge that.”

Bloch said financial planners seem to be “fair game” and “under attack” by self-interested, sectional groups.

Bloch said some planners are now looking at different business models and how they might better manage their costs and run their businesses.

However, McMahon did note that well-established practices and those with strong referral services were generally doing well.

Platform fees trim dividends from investors' portfolios

Platform fees trim dividends from investors' portfolios

29 April 2009 | by Benjamin Levy

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Platform fees that are charged by platform providers are taking too much out of advisers’ clients, and clients don’t realise how platform fees can impact on their dividend income over time, according to the director of Capel and Associates, Rick Capel.

While there is proper disclosure in terms of external platform fees, clients don’t understand whether the fees are reasonable or not. Advisers who forgo investing their clients’ money through an external platform and invest their clients’ shares directly with their own internal platform can save clients up to 80 basis points in fees, Capel said.

Capel said that in a normal market environment when an asset class does particularly well, when the profits are realised in rebalancing the portfolio, part of those profits will go towards paying platform fees. That practice was questionable in the current market turmoil.

“In this period where most of the asset classes have gone south, I question the practice of rebalancing a client’s portfolio, which may crystallise losses simply to refloat the cash account in order to pay the adviser or dealer fees.

“This rebalancing exercise creates an unethical bias, which any professional adviser should avoid because their fees have to be paid out of asset sales,” Capel said.

Portfolios should be modelled around cash flows so that clients can tell how much of their investment dividend is going towards the cost of operating the platform, he said.