Fees a hurdle for advisers
Questions are being raised about the affordability of wrap platforms for small adviser businesses.
Tuesday, September 9th 2014, 6:00AM 
18 Comments
by Susan Edmunds
Providers charge up to 3% once all fees are included although many were hesitant to reveal them in detail, claiming commercial sensitivity.
Wrap platforms will likely become even more vital for investment advisers as they adapt to new DIMS regulations.
Ben Brinkerhoff, of Consilium, said the higher fees in the market could be a hurdle for investors. Consilium charges 0.75%, including investments.
“Three per cent does create a problem. If an adviser is using a balanced portfolio they might hope to get 7.5% or 8% before all fees. If you chop the 3% off, there’s a good discussion to be had about whether [the investor] should be in term deposits. That’s a discussion the adviser is going to have to argue against. Some wrap platforms are expensive, which would disadvantage advisers.”
Regulation was forcing advisers into the hands of the providers, he said. “I know a lot of advisers who’ve gone to bigger organisations. I don’t know how they do it at 3%. You’ve got to be able to do something beyond putting an investment portfolio in place, you’ve got to find a niche.”
Adviser Alan Clarke said the costs were prohibitive for people starting out – especially if they also had to pay $23,000 in compliance costs a year, as claimed by the IFA. That figure includes AML audits, AFA authorisation, FMA levies and education as well as the number of hours involved.
“If a young guy is coming in, how he can afford to buy a retiring adviser’s practice? Do the sums, it’s not too hard to work out. Some of the groups are pretty greedy. After the business running costs, what’s left?”
He said the industry needed to look at where new advisers would come from. “You’re not allowed to make money from KiwiSaver and Kiwis don’t want to pay for advice. [If you’re retiring] you have to sell to someone like AMP because I don’t think the young ones can do it.”
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Comments from our readers
On 9 September 2014 at 7:21 am Unsure said:
Whilst it is unlikely that there is a huge amount of prospective buyers in the far north, the main centres have a growing number of younger advisors who are very keen to acquire shareholdings in advisory businesses that they are involved in On 9 September 2014 at 9:11 am Brent Sheather said:
Interesting article and good that some of the financial advisors with high cost structures are finally coming out of the closet. Having said that it would be nice to see annual fees itemised ie how much goes in fund management fees, how much in monitoring fees, how much in platform fees and an estimate of the impact in terms of percent per annum of transaction costs. We do this whenever we prepare a recommendation for clients.
Moving on Mr Brinkerhoff says that returns from a balanced portfolio will average 7.5% to 8.0%. How does he arrive at this number ? If I do the sums I start with the fact that a balanced portfolio for the last 30 years has been 40% bonds and 60% shares. A high quality bond portfolio like that typically owned by a pension fund (minimal exposure to junk as per best practice) has a weighted average yield to maturity of maybe 4.0%. All the academics tell us global equities are priced to return 6.0% in perpetuity and this is confirmed if we throw the key variables into the Gordon Growth Model. Given the higher yields locally and in Australia we can assume 8% from those markets to give an optimistic weighted average of 7% from our share portfolio. Given the 40/60 weighting we get a total return from a balance portfolio pre tax, pre fees of 5.8%. This is quite a bit lower than Mr Brinkerhoff’s 7.5% to 8.0% estimate but as we all know the finance sector has a long and inglorious reputation for overestimating things. Mr Brinkerhoff’s 1.7% pa annual charge, which presumably doesn’t include transaction costs, thus reduces returns by almost a third. A 3% pa annual fee structure reduces returns by more than half. We know what advisers’ typical response to high fees are … they push clients’ risk profiles higher.
In the UK the FCA regulate advisor projections. Another thing that the FMA should be doing.
Regards
Brent Sheather
On 9 September 2014 at 9:58 am alan clarke said:
Just to clarify what I said.
Wraps cost 0.10% to 0.40% pa and do a great job in terms of custody, virtually paperless, instant trading, efficiency and security. Both investors and advisers share in these benefits in many ways. I use Aegis and they are superb. On a cost vs benefit basis, a complete no brainer.
The 3% comes in when you add the wrap fee to the adviser fees of 1%, plus active manager fees of another 1.5% to 2.5% - then you are over 3% . I doubt anyone can find an active manager who will outperform consistently, year in, year out, to justify the 3% in costs.
I use DFA who charge 0.3% pa to provide an excellent combo of active and passive management, but no stock picking or forecasting. They are the best I can find (after 26 years in the industry).
Over the past year I met 2 young advisers who were looking like “tomorrows men”.
One of them left the industry completely for a better opportunity..
The other told me he just “hates compliance” and “my mortgage (in Auckland) is big enough, how can I borrow more to buy a client base too? ”
How could he?
Compliance will cost him $23,000, an investment advisory group will want 20% of his income (but he will need them) plus office rent, PI insurance, part time secretary, telephone, motor vehicle, computers et al. If he grosses $150,000, he will see $100,000 go out in costs. And it is not a risk free business either – far from it.
I hope the FMA read this, and comes up with a govt subsidised “young adviser cadet scheme”.
I sincerely hope the big heavies like AMP and the banks don’t get to dominate this industry, as it will leave the consumer a lot poorer for choice, and probably poorer too.
So long live the independent groups like Consilium, Trustees Executors, and groups such as those Simon Hassan belongs to.
On 9 September 2014 at 4:43 pm John Milner said:
It's not all bad out there. Depending of course on the work required and the funds to be invested, I can easily provide an attractive investment proposition of 1.75%pa or less. This includes but not limited to daily automatic rebalancing, independent trustee, etc. but more importantly, no DIMS to contend with. Rather than try to portray myself as some miracle fund manager, I put my resources into an area I can actually add value i.e. manage emotions, expectations, planning, etc. On 9 September 2014 at 8:20 pm Tony said:
@ Alan - One of the issues facing the industry isn't the 'heavy' corporate. It's the adviser who wants to maximise his sale price for his business without investing time and commitment to the new adviser(s). Done carefully, the new adviser can be helped through the early years and gradually buy into the business with the mentoring of the outgoing. A smooth transition is highly possible with a win win for all parties. Unfortunately structure and greed can get in the way. On 10 September 2014 at 10:10 am alan clarke said:
to Unsure - I have not seen all these young advisers at conferences, indeed the average age seems to be about 55+
Perhaps the FMA or IFA could give us some numbers - how many AFA's in total and how any AFA's under 40 ?
nb.I am talking about investment advisers, not in insurance advisers
I am guessing the number of AFA's under 40's will be low
Brent you are giving us someone's forecasts, which, with due respect, are of little value, given the variables and difficulty in doing so with any degree of accuracy
DFA Fama-French historical calcs using their methodology from 1926 to 2013 are;
small co shares 11.93%
value 10.46%
large 9.75%
add in NZ bonds and NZ hedged global bonds NZ bonds at 6% to 7%
then read top academics Fama & French research - then you will see Mr Brinkerhoff's balanced fund at 8% looks about right
happy to send the DFA chart to anyone who asks
On 10 September 2014 at 12:33 pm Gavin Austin ABCompliance said:
A great discussion and one that is dear to my heart. But before I say anything more I want to declare a possible conflict. I provide the majority of Consilium Adviser Groups with their Compliance Resource.
So what do clients pay in total for the advice? A good question with a number of potential answers. What I would suggest advisers focus on is what value the client gets by using their services. The answer to this may well be found in the following article “The Value of an Adviser: worth more than 1%” by Brad Jung, Director, Northwest Division US, Private Client Services – Russell Investments. Use the following link http://blog.helpingadvisors.com/2013/06/25/the-value-of-an-advisor-worth-more-than-1/
You can reach your own conclusions but it seems to me that a good adviser using well researched solutions should be able to add 2-3% value to the client. Obviously the adviser fees and other costs will determine if the final balance is a plus or minus (and don’t forget that there is some tax relief on some of the costs as well).
On 10 September 2014 at 3:25 pm Brent Sheather said:
Oh dear Alan, your comments make me quite sad. There is a huge body of research which shows that historic returns on world stockmarkets can’t be repeated unless markets fall greatly first and your comment that future returns will be higher than what I said based on historic returns shows a disturbing lack of knowledge. You are no doubt aware of the Gordon Growth model ie R = D + G … well consider what D on the S&P500 was back in 1926 … hello it wasn’t the current 2.5% … it was 4.2% or thereabouts. Robert Arnott and the late Peter Bernstein wrote a paper called “Earnings Growth: The Two Percent Dilution” in the Financial Analysts Journal which from memory won the Dodd & Franks prize in that year which showed that there were 3 or 4 extraordinary non-recurring factors which were behind the historic returns since 1900 … foremost amongst those was the higher yield prevailing then and second in line was the fact that shares had become a lot more expensive. I have written about three Herald articles on Arnott’s story and can email them to you if you want to see them.
You can understand better the logic of this if you look at what bond yields have averaged since 1970. From memory 30 year treasuries peaked at 11% in 1987 – today they are less than 4.
If you were doing an AFA course I’m afraid you would get failed on this effort. Regards Brent
On 10 September 2014 at 3:58 pm alan clarke said:
Tony
I like the idea of the slow transition out and the new boy in over several years.
But Mike Moore, business broker to our industry, pricked my bubble - he said "great in theory, Alan, but it just does not work in reality".
Why?
Structure, greed, complexity of who pays what and who owns what, the new boy impatient to get the old boy out, the old boy being set in his ways, & being sure he is right, and many other reasons.
Mike said in his experience you sell and go within a year.
Sadly I suspect he is right.
The old farming adage - if the son taking over does not get control of the cheque book by age 32, he won't stay.
On 11 September 2014 at 7:55 am alan clarke said:
Oh dear Brent
You recently said an adviser who had not studied all the funds available had not done his job properly. But I happen to know you have not studied the DFA model in depth, and they are a substantial organisation with an impeccable reputation, managing over US 200 billion worldwide.
They have done some great studies including the Fama-French 3 factor model, size and value effect, designed a very clever (non forecasting) bond fund stagey, and their incredibly low cost trading methods are fascinating.
Eugene Fama and Ken French are leading academics, and winners of many awards. Eugene Fama is a 2013 Nobel prize winner. By the way, their evidence based research shows that no one can forecast with any degree of accuracy.
You need to attend a 2 day DFA primary to gain any real insight into their model, and I know you have not done that.
Moving on, you constantly attack other advisers fees. I gather your don’t see clients face-to-face so you cannot ever really get to “know your client” and if you don’t, you cannot really be a real financial adviser.
In fact it sounds to me like you are more of a fund manager.
For my fees of around 1%, I make a real effort to get to know my clients and I provide them all sorts of financial and related advice. Too long to list here but happy to email the list to anyone (it’s in my new book too). My 1% fee covers all this advice at no further cost
e.g. recently an elderly client married for 3rd time and was really worried about how to write his will to be fair to all. I explained how he might do so, wrote it up, then sent him to his lawyer to double check and action. I even got a “very well done, great work ” message back from his lawyer
Disclaimer - although I have been an adviser for 26 years, I certainly don’t know it all, and I am all too aware I will never know it all.
PS you should know that Ben Brinkerhoff (the 8% balanced fund commentator) is a researcher with some considerable skills and experience
On 11 September 2014 at 10:33 am Brent Sheather said:
Hi Alan
That’s fair enough. I tell my clients that meetings generally are just to solve crises and after the initial meeting, with a bit of luck, they will never see me again. All correspondence after that is generally by phone or email. We do have a disclosure statement which says that our advice is limited to investment matters and we don’t do dog walking, marriage guidance, hospital care, offer cooking advice or do yoga with clients.
Given the option our experience is that clients would rather have a total expense ratio of 0.5% pa including monitoring, fund management and platform costs and none of the above peripheral services rather than receive the above and pay 3% pa.
Regards Brent
On 11 September 2014 at 2:06 pm R1 said:
Alan, scanning the DFA Australia prospectus I see actual Indirect Cost Ratios of 0.23-0.69% for 2012 and caps of 0.35-1.00%. It states that these charges include management costs but they also use another term management fees as well so not sure if there is another layer of costs. These fees also explicitly exclude underlying fund manager fees for funds they may invest in. I understand that under the new legislation fund managers are required to disclose the 'look-through fees' so presumably there is a clear disclosure of these fees somewhere. I would appreciate your help to find it.
If I add in platform fees as you state of 0.1-0.4% and your advisor fee of 1% I can see total fees for the client of 2-3% as quite plausible.
On 11 September 2014 at 2:36 pm alan clarke said:
Our total new portfolio fees and set up costs are less than 0.3% including brokerage and exchange rate fees that we cannot avoid - way less than yours. Our clients get a big head start compared to your clients
And just like you, we listen to the academics, but unlike you, we don't take them as gospel. We add a chunk of common sense to balance whatever they say
Our total on-going fees are 1.7% pa including Aegis, DFA and our fees.
Or less for bigger clients since we have the usual sliding scale of fees
And we give them all a full financial advisory service.
I was a topdressing and crop spraying pilot for 20 years and flew 11,000 hours, working in NZ, Africa and the UK.
Sadly I knew quite a few pilots who had supreme self confidence, and they lost their lives
So what's that got to do with this ? you handle other peoples money and display supreme self confidence.
That's a scary combination!
regards
Alan
On 11 September 2014 at 8:45 pm alan clarke said:
To R1
The fees on the DFA funds we use;
Global Five year bond fund 0.29%
Global Corporate bond trust 0.35%
Australian core equities 0.32%
Global core equities 0.45%
Global Real Estate 0.45%
S& P comment on global core - The ICR is 0.45% per year, which is marginally above the cost of a passively managed fund. We consider the product to be well priced, given that it is expected to offer better returns over the long term than a pure index fund.
RI - if you want any more “help”, drop the nom-de-plume or contact me directly
On 12 September 2014 at 9:01 am R1 said:
Alan, does that 1.7% include underlying fund managers fees; i.e. the funds that DFA invests in as they state in their prospectus? On 12 September 2014 at 10:49 am alan clarke said:
ACTUAL DFA ICR's
their 2 bond funds 0.3%
Ozzie shares - 0.32%
global share - 0.45%
Ozzie and global incorporate large value and small shares
DFA pay huge attention to trading costs, so they are amazingly low
They also do not licence advisers who think they can stock pick or forecast, as those sorts of advisers add costs to both DFA and their clients
Sorry chaps will no longer reply or comment if you use a nom-de-plume
On 12 September 2014 at 11:56 am R1 said:
So it is safe to presume the 1.7% total fees excludes the fees of any fund managers DFA's funds above invest in. Thanks Alan On 13 September 2014 at 12:29 pm Andrew Parkinson said:
Thanks for that link Gavin. http://blog.helpingadvisors.com/2013/06/25/the-value-of-an-advisor-worth-more-than-1 . Helps explain the opportunity cost of not having an adviser. Sign In to add your comment
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