Industry funds vs. planners

Financial planners stink and industry funds are great. Or vice versa. Apparently, one is supposed to pick a side.

As anyone who touches on this subject is invariably accused of bias, let me begin by declaring certain attitudes.

Possible bias

I have provided financial planning service exclusively on a fee basis since 1990.

Clients’ portfolios are managed within wrap accounts, which provide access to the cost savings from underlying wholesale funds, consolidated tax reporting, efficient management of portfolios and so on. All commission is rebated to my clients.

All other things being equal, a lower cost product is preferred to a higher cost one.

I feel affronted by advertising that suggests all financial planners provide no value. Equally, I acknowledge that commission-based advice does create a commercial bias towards commission paying products.

Finally, for a number of years my colleagues and I had an arm’s length relationship with an excellent industry fund, which included our running seminars for their members.

Platforms not investment products

To put the question of industry funds into context, generally they are platforms (that is, they compete with wrap accounts and master trusts). Both price and service are significant when evaluating platforms.

The following are essential elements of platform service, and, therefore, for industry funds if they seek to gain a material share of the fee for service adviser market.

Responsiveness to advisers regarding available products: It is essential for platforms to provide planners with the developing range of products they need over time. Some advisers wish to include not-yet-mainstream boutique funds or alternative assets or non-unitised product (for example, term deposits). The available list needs to be responsive. The most flexible platforms provide good service in this respect.

Integration of super/ non-super portfolios: Clients’ affairs must be addressed as a whole. Superannuation and other assets need to be able to be managed in a co-ordinated and efficient manner including being reported on, fees collected from and assets transferred between (for example, contributions to super or income payments made from super, portfolios rebalanced between them, and so on). Platforms must facilitate this.

Fee collection: Fees should be negotiated in advance and agreed to in writing by clients. They should then be collected efficiently (that is, electronically). Some will charge a flat monthly fee; others will be based on the value of a portfolio or some other method. The platform needs to offer this facility.

Reporting

The efficiency of an adviser’s service is dependent on the reporting from platforms, which raises the question of unit pricing.

This was the subject of a ‘robust exchange’ between Barry Lambert and Garry Weaven in these pages, so I’ll explore it in a little detail.

Weaven claimed that daily unit pricing is of value only “where a client wishes to trade in and out of super funds on a daily basis”.

Thankfully, we have no clients who wish to do this, but we could not consider recommending a platform that offers only monthly unit pricing.

It needs to be understood that planners think in terms of a portfolio of underlying investments, usually managed funds and/or direct shares. The platform is merely a vehicle in which to hold them.

We report to clients on the income and growth returns of each individual underlying asset in their portfolio. It’s true that few clients need this on a frequent basis (though a small number feel it is a good use of their time to look frequently at their portfolio online). However, every day of the week we do see clients and they want a current report on their affairs.

It would not be acceptable to provide data that was up to a month out of date. First, this is simply poorer service than our industry is accustomed to provide. Second, there are times when this would be totally unacceptable.

> Some clients call their adviser for an update after material market movements (for example, the day after the September 11, 2001, terrorist attacks or the 10 per cent slump in China’s/world markets earlier this year). These tend to come from less experienced clients, especially those who have just invested.

While these events are not common, it would be quite unacceptable to say to clients who were concerned that we would not know how their assets were affected for several weeks.

> Following the crash of 1987, a group of investors who made redemption requests earlier in the month but did not get paid out until after the market’s fall successfully obtained compensation from their advisers. In the more litigious modern world, few planners would be comfortable with this prospect.

> At the end of every financial year many managed funds make large cash distributions (of realised gain), sometimes of 10 per cent or 20 per cent of the value of the fund. This changes the portfolio’s asset allocation and often requires rebalancing.

We also often hold back new investments until we can buy at the ‘ex-div’ price to avoid turning capital into income. Up to a month’s delay in these actions would be poor service.

A platform should not report unit prices less frequently than its underlying investment products. If industry funds wish to compete for the business of fee-for-service advisers they need to adopt the standards we are used to in platforms.

Service standards

If industry funds do want to be recommended by advisers they will need to actively compete in that marketplace.

This will require the services detailed above, the capacity to facilitate contact between their underlying fund managers and research staff, and so on. They will need the commitment of resources to back-office administration support for advisers, which can be substantial.

It will also require sales staff to promote the product. Administration platforms are not products that sell themselves.

Planners and industry funds

The mathematical principle behind the industry fund ads is inarguable: lower costs contribute to higher account balances.

However, the suggestion that planners are the problem is misleading.

Retail funds’ costs tend to be higher whether a commission is paid to an adviser or not. The media campaign is based on the different fee structure in products — the mentioning of advisers is merely gratuitously insulting.

While acknowledging, as I do, that operating on commission will provide a bias against including industry funds, the reality is that many fee-based advisers are not using these products. This is not because of any bias, but on the basis of factors like those listed above.

Also, inevitably, a consequence of the negative marketing campaign will be that even fee-based planners will develop some hostility to the funds.

However, it may be that industry funds have no real desire for planners’ support, preferring a direct model.

Planners may simply be a convenient hook on which to hang the advertising campaign. As the ads seem to have been successful, there is little reason to expect any change soon.

Over time, retail and industry funds will approach each other.

Industry funds will increase service levels to meet member demands, though this may drive up their costs.

Retail funds will continue the current trend towards lower costs. Perhaps, in time, industry funds will even follow the course charted by mutual life companies and recognise that shareholder capital is necessary to sustain and grow a business.

Certainly, life companies have seen a dwindling popularity of products that smooth returns by the use of reserves — because this was used less to ‘smooth’ than to adjust returns to suit marketing objectives.

One of the enduring trends characterising the financial services industry over the past quarter century has been that clients bond with people not institutions.

Thus, the role of planners has steadily grown. While a multitude of products will always be sold directly, the bulk of fund flows will remain adviser directed. Industry funds have run a successful direct campaign; however, it will be hard for them to grow beyond a certain market share without the support of advisers.

Some funds have attempted to address this by building an in-house advice capacity. To the extent that this involves advice that is biased towards related products, they will suffer the same credibility challenges as faced by all tied sales forces.

Several of these advice businesses were created using capital from superannuation funds. Some retail businesses committed the same sin.

This is clearly misusing the funds of members, which should be invested for their benefit rather than to meet the business objectives of the super fund operators.

At the risk of generalising, most industry funds are low cost, low service platforms (though this is perhaps not true of their insurance offerings, which tend to be expensive).

The spectacular growth in market share of Colonial First State’s FirstChoice platform, on the basis of good service at a lower cost to clients, shows that advisers are price conscious when ‘buying’ for clients.

However, there seems to be a minimum level of service below which advisers won’t support a platform.

Over time, there is no reason why some industry funds can’t tailor their offering to meet the demands of this market. Of course, this is not to deny that failure to pay commission will prevent support from some, but not all, advisers.

Robert Keavney CFP is the chief investment strategist at Centric Wealth Advisory .