Managers are caught in the crossfire

By Merv Burrage

FUND Managers are caught in relationship crossfire. The demand for greater performance and transparency is gathering momentum. Consumers and key players in the food chain are not happy despite dramatic industry changes and improvements over the last 10 years.

Today, proper authority holders and financial planners operate on low fee and or trail commission structures. There is even talk among fund managers about surviving on fees as low as one per cent and that’s well below current levels.

Currently, 100 new products are introduced to the marketplace every month. There are now approximately 19 million Australians with 7,000 funds managing $600 billion. The USA has approximately 8,200 funds managing US$6.97 trillion for around 240 million people. Our industry is top heavy and living on borrowed time.

Historically consumers have found it difficult to penetrate the industry veil of complexity. The Australian Consumer’s Association (ACA) chief executive Louise Sylvan believes there is much to be done on industry accountability and transparency including:

- a reduction in the number of funds;

- fair fee and other charges disclosure;

- greater performance transparency and fund comparability; and

- the impartiality and independence of planning and dealer groups from fund managers.

The ACA position and attendant pressure it will exert in the near future raises major issues for key industry participants at a time when distribution consolidation is in full swing. The ACA’s view is that fees are too high and there are too many funds for consumers to make sense of the differences and similarities between funds.

Interestingly, an unexpected industry participant supports the ACA position on too many funds and fair pricing. Ratings house Morningstar, has said it feels the same and managing director Graham Rich says at least 1,550 smaller and older funds should be “killed”. This is a big number.

At the recent Investment and Financial Services Association (IFSA) national conference Rich cited examples of funds with very few members and the impact on their returns. He suggested fund managers struggle to close funds and the continuing costs adversely impact their MERs.

Importantly, Morningstar also believes some funds are characterised by:

- misleading advertisements;

- misleading performance; and

- misleading fee disclosure and expensive, poor performing funds.

As if this is not enough for fund managers, a recent survey of adviser services provided by fund managers and consumer research on fees and charges reveal the managers have much to do.

The survey revealed a high level of dissatisfaction with fund manager’s adviser services and says there was widespread unhappiness among planners who were patient and prepared to put up with abandoned phone calls, poor technical support, inadequate information flows and generally poor standards of service.

The views of planners contrast sharply with a departing industry expert’s views. Charles Macek, formerly of County Investment Management has apparently stated: “The big weakness in the structure of the investment management industry is the plethora of intermediaries involved in the supply chain, all of whom have to be fed and all of whom bring their own business risk to the system”.

The issue of how advisers and other intermediaries are fed is increasingly topical. The issue of fees versus commission is in need of resolution from all sides of the relationship triangle. IFSA has taken the initiative with long overdue consumer research. The findings suggest the industry enjoys a higher level of trust than the banks and insurance companies. Consequently, consumers are generally less sensitive to fees and charges when they enjoy relatively high dividends.

Nonetheless, the research also points to possible discontent on issues like transparency and disclosure, plus uncertainty about the possibility of the planner recommending a managed investment from which they generate higher returns.

A reasonable proportion of the sample found it difficult to understand the fee structure and to ascertain exactly how much the total cost is. Significantly, majorities within this proportion “admitted that they had not thoroughly assessed the fees and charges prior to deciding upon their most recent managed investment”.

One question that will have to be addressed in the new world of transparency and disclosure is ‘What constitutes a reasonable fee for service?’ If the ACA is able to exert greater public scrutiny, fee structures in absolute terms may be forced down.

The cost of business trends overseas offers compelling insights into to what might be expected in Australia in the near future. Could it be that one per cent managed investments is just around the corner? That is one per cent to cover basic advice, commissions, investment management, administration and development.

If the one per cent level was forced upon the industry tomorrow the shock waves would severely shake everyone in the business. Local fund managers are driving to a lower cost business model. However, progress is slow.

Ultimately fund managers will be forced to move with greater speed because the industry can no longer avoid dealing with the fundamental pressures being placed upon it.

Fund managers are caught in the relationship crossfire. The way forward is for managers and advisers to reinvent their valuation proposition. The industry has much to gain by improving value in the broadest sense. There is an opportunity for the industry to take a leadership position. Will the industry seize the moment?

Merv Burrage is the principal consultant for 5D Financial Services