Advisers discount Internet at own peril

Three developments over the past few weeks point to a major surge in the purchase of managed funds without advice and a major headache for advisers without their fingers on the pulse.

Three developments over the past few weeks point to a major surge in the purchase of managed funds without advice and a major headache for advisers without their fingers on the pulse.

The first is the aggressive play by TD Waterhouse and ComSec to pry customers away from financial advisers and over to their Internet managed funds broking services. TD Waterhouse says its service will “shake the financial services industry (and) place pressure on traditional distribution channels for managed funds.” ComSec’s television campaign launched last week features a stuffy looking adviser whose job it is to diminish investor returns by taking fees. Both services are clearly asking: “Why pay an adviser when we can do the same thing for you?”

The second development is Hartley Poynton’s decision to spin off its back office service for Internet broking into a separate business called JDV. The interesting thing about the move is not so much the potentially lucrative business opportunity for Hartley Poynton, but the target market for the service. The group has already signed up a sizeable chunk of the banking and share broking market to its service and will continue to grow that chunk. But more importantly, Money Management understands it is also looking to sign up financial planners to use the back office service for their own managed funds/ share broking service.

And Hartley Poynton is not alone. There are already a number of advisers offering a managed funds broking service — just look at the services offered by Neville Ward Direct or Count planner Bernard Moses.

The third development, while not a move towards non-advice managed funds in-vesting in itself, nevertheless will facilitate it in the future. Since early last month, investors have been able to invest in BT’s TIME fund without physically signing a prospectus. Investors use the B-Pay service to purchase a managed fund on the Internet with no lead time. This is the first time investors have been able to buy managed funds using only the Internet. It opens the door for other fund managers to deliver funds directly to customers more effectively and more efficiently.

Two years ago, the stock broking industry was faced with a similar situation. Full service brokers were bombarded with discount brokers for the first time. Since then, these Internet brokers have seen market share severely eroded and margins

And the central argument used so successfully to bring in the punters? “Why pay one per cent commission when we can do the same thing for far less” — the same argument now facing financial planners.

No, the financial planning industry is not the managed funds broking industry. But at the same time, a substantial part of an adviser’s income comes in the form of trail and upfront commission paid on recommending managed funds.

The big mistake made by the full service brokers was to ignore the developments and pretend they were not a reaction to the substantial fees they were charging cli-ents for what was sometimes simply a transaction service. In other words, they had failed to put discount Internet broking as a factor in their marketplace when they were fine tuning business plans.

Let’s hope financial planners do not fall in the same trap.