Quality of advice alone does not offer IFAs a “compelling differentiator” from larger groups and rejecting managed funds is the first step to true independence.
This is the view of Bailey Roberts Group director Leith Thomas who believes the Future of Financial Advice (FoFA) reforms have forever changed the landscape, forcing the consideration of alternative sustainable models for independent advisers.
“As well as the economic environment over the past few years, FoFA legislation has changed the landscape – forcing a major rethink in how independents position themselves in the market,” he said.
“While many advisers are being integrated into the large dealer groups, others are struggling to offer a strong value proposition to their clients.”
A compelling differentiator
However, Thomas parts ways with conventional wisdom by asserting the view that “Bailey Roberts Group does not believe advice alone offers a compelling differentiator from the larger groups”.
“While many advisers claim independence from the large groups, they are still using wrap accounts and platforms owned by product producers – and therefore offering their clients the same resources in terms of research, risk management and products as the dealer groups,” he says.
“In reality, many of the so-called independents have become sellers of a commoditised product. Not only does this mean that a clear value proposition is not being offered, it also exposes independents to the risk that as clients become more educated, the major selling point for them will be based on price. That makes building a sustainable business model difficult.”
Thomas also warns that even being compliant with all aspects of FoFA and the regulator’s guidance on various aspects of the impending reforms does not ensure success.
But it is the value offered by managed funds that he believes is at the root of the problem.
Rethinking managed funds
“Managed funds are a commoditised product, offering little or no performance differentiation over the market,” he says.
“Do clients see value in charging a 0.5-1 per cent fee for advisers placing their funds with a manager? Can there be a sustainable business model around charging a fee for this?
“Managed funds offer neither client nor adviser control over where the funds are invested, how the funds are managed, nor how issues such as tax are managed.
“There is also no control over what other unit holders will do or how their actions will impact the remaining holders units.”
Peripheral services not the answer
Thomas concludes that clients have an expectation that their adviser is managing their money and to build a business model that relies on ongoing revenues from client assets – while not providing any real ongoing service or value to those assets – is a high-risk model.
“It means having to use peripheral services such as reviews to justify ongoing fees – a strategy that many advisers have currently taken,” he says.
“Not only is scale difficult with this type of model, but it means clients do not see value in the offering.”
“In order to avoid their advisers being seen as commodities, merely offering advice and client reviews, independents need to offer a clear value proposition.
“The direct management of portfolios offers clients a clear differentiator, and a cost effective offering.”
Some very good comments. I personally believe there are two areas of discussion presently taking place. One, client advice and two, portfolio construction. As an adviser I offer comprehensive advice to clients by forming trusted relationships and therefore fully understanding their goals and what works for them. Some of my clients only require and suit a portfolio constructed by managed funds whilst other clients suit a more directly held investment approach. Many factors come into play when deciding on the right portfolio construction to help support the underlying advice and strategies to a client and I don’t think either way will suit every client. My main point I want to get across is that trusted advice (which goes well beyond where one should invest) and portfolio construction (how and where one should invest) are very different decisions and should be made in consultation with a client. And yes, fees, resources, scale, taxation should all be a factor when making a decision.
Some good points raised here. I am a genuinely independent adviser and I don’t use platforms or recommend managed funds, they add unecessary cost to the client and no value, and they don’t illustrate that you have the client’s best interests at heart. Recommending direct equities, property, EFT’s etc (and managing them on an ongoing basis) is where the real value is for clients, and this provides the foundation for strong relationships going forward. This ‘hands-on’ approach also provides plenty of justification for ongoing fees charged.
Some interesting comments. Seems to have hit a chord!
I must say straight up that the issue around platforms and managed funds etc for me has nothing to do with independence or how good other fund manager are, but rather everything to do with value proposition for an adviser.
Good thing is, we clearly have different opinions and they are just that! My opinion is based on what I believe to be a sensible and logical business model guided by what I believe is good for the client and what I have found they want. My clients value being in control of their wealth, knowing who is managing it, knowing their tax ect. If you are saying your clients ‘values’ are different, that is fine! None of my clients would use you as an adviser and based on what you are implying probably vice versa! For me, I am just saying that I don’t find the prospect of building a business around charging clients an ongoing fee predominantly for a few review meetings all that exciting from a sustainability or competitive advantage perspective. If you do, go for it.
Sam, as for the specific comments regarding direct management of client portfolios, there are too many inaccuracies to address each. What I will say is that we have been doing it successfully for well over 10 years. You (and anyone else) are more than welcome to spend a day in our practice and see how we do things, speak with our full time analysts, look at our systemises, our methodical portfolio construction and investment selection process, our performance, client fees (which in my experience are substantial lower than what most others are paying!), clients feedback, speak with our advisers and see if you reach the same conclusions as you have arrived at here. Indeed…after gaining this knowledge I would love to hear your opinion on where we are going wrong and when you look at the capital spend on what it took to develop what we have, how you justify your statement that we only did this to line our “own back pocket”.
I am sure you can find my contact details if you want to take me up on this offer!!
Reading between the lines, I think that Sam and Leith both make valid points in relation to the management of direct equities.
I think that Sam was saying that direct equities is a specialised skill set requiring the attention of appropiately qualifed and experienced investment managers. It seems that Leith’s business has this.
If you are a small operator you really have no choice but to out-source your client’s investment. Managed funds offer an obvious solution however there are at least half-a-dozen first rate IMAs, SMAs and MDA available in this country.
However the point that is being made by a number of respondents is that the role of financial planner and investment manager are two very different roles requiring different academic qualifications, different skill sets and different day-to-day duties.
I agree as, in my opinion, there is no individual that can competently do both jobs properly or with integrity.
So far as platforms are concerned, whilst it is a lovely thought to have your own platform they take time and money to develop.
Using a platform is no different to a lawyer using precedent documents or sourcing their trust deeds from a specialist firm. To extend the analogy (torture it maybe) it is no different, in my opinion, to a surgeon using a hospital’s operating theatre – sure OTs are different from hospital to hospital and some have quite limited facilities, but it is up to the doctor to ensure that the OT that they select for their patient is appropriate. Sure, they could make more margin by opening their own day surgery or specialist hospital, and plenty do, but this tends to be a commercial decision available only to those doctors who have sufficient scale.
The direct management of portfolios is a great way to increase your workload and cost to serve, increase your client’s fee, and decrease the net return your client receives. A terrible business model for everyone concerned.
I couldn’t disagree more. The real value of a financial adviser lies in the relationship with the client, where the adviser takes on a ‘project manager’ role and assists the client with all aspects of their finances including dealing with their other advisers, accountants, brokers etc. It’s about knowing a little about a lot, then having a network of like-minded professionals who can assist when more specific / specialist advice is required. Not every client cares about the advisers technical competency or how well they can quote P/E ratios – clients care about trust, the relationship with the adviser and ultimately the lifestyle that our advice will allow them to achieve. In my view, fund managers or stock brokers are just another specialist / professional in my network that can assist me to advise clients. I don’t claim to be a ‘market guru’ and I don’t have time to do extensive research on direct investments. By positioning my advice as strategic and the fund manager as a professional to whom the client and I outsource the investment management, we also have a much easier conversation in tough markets as the client knows and understand that I’m not making the day-to-day investments decisions – some clients also enjoy acting as ‘CEO’ and getting involved in the decision to replace a fund manager.
Article seems much to focused on managed funds and investment vehicles. An advisers value proposition should be based on….. you guessed it: VALUES! Client values. If advisers (and the author) out there still relate their value proposition to products or investment vehicles, then these are the ones who need to re-thing their CVP.
I couldn’t agree more. With Sam and Paul’s comments. How is the public going to know what a financial planner should be doing if we don’t know? A good financial planner is ultimately a trusted person one receives advice about their overall position. Be it, estate planning, be it insurance, be it Centrelink payments, be it superannaution strategy, be appropiate level of investment risk etc. The role and value proposition is there. Unforutnately, this is often poorly executed due to commercial and personal interests. Some adviser’s are hunting for FUM, other’s risk premiums. This is where the reward is, but not the value for the client.
I do think that IFA’s need to lead the drive to push down the excessive management fees charged in Australia. We are one of the biggest markets for these guys, so the economies of scale are present – yet we pay more than anyone else?
Is this guy serious? Any adviser (with the odd exception) who thinks they do enough research on enough companies on a day-to-day basis to determine fair value for that company and build a portfolio is kidding themselves. It sounds like he is talking about investment analysts or stock brokers. Part of the issue with the industry is cowboys pretending they know something about fair value of a company because they know what the company does.
I think Leith is on the completely wrong track. Advisers use direct shares because they know that it will keep clients because they don’t want to pay MER’s and it is harder to go and pick shares than managed funds. What clients don’t realise is the advisers themselves are either just working off a model from a stock broker (which is really no different from investing in one fund manager, except that the fund manager is more active and takes more of a price focus) or throwing darts at a board. They are running more concentration risk (just one investment idea and generally less stocks) and having a much less active portfolio. What about international shares, are clients going to invest in those directly too? How about fixed interest and property?
True, especially in Australia, there are a large bulk of commoditised managed funds, but there are also some really good managers with really good ideas. I’d rather be risking it with them than some part-timer pretending they can cut it in the big league. And yes, some advisers just pick random managers with no thought and just use the Platinum range for international shares and the client might as well do it themselves. However, the only reason an adviser would prescribe to the above model is for their own ego or own back pocket.
What do platforms have to do with it? A lot of platforms are cheaper than SMSF’s these days. If they are the best vehicle, they are the best vehicle. It has nothing to do with “independence” and everything to do with what is best for the client.
Tax is an issue. I can’t argue with that, but some funds are tax effective and some aren’t and no inivestment decision should be made purely on a tax basis. It is not that big of an issue to decide your investment approach. Are you really not going to take a profit because of tax, even if the company is over valued?
This is laughable, but it unfortunately will get clients across the line. So who is this model really benefiting? Rather ironic.
I really don’t think I could disagree with this artice more. Direct management of portfolios simply makes you an alternative fund manager and you will be making the same claims to expertise as the fund manager. The concept of “merely offering advice and client reviews” as a value proposition is sound – just not always executed well. If all you see as the value of financial planners is ‘selling’ managed funds, you are sadly missing the entiore point of professional financial planning. Investment advisors such as your expert are not financial planners and the deep relationship that is required to effect and deliver proper advice over a number of years requires a lot more than ‘investment outperformance. This is the paradigm that got us into this FOFA mess remember (Storm anyone??). The key differentiator between channel based advice (banks etc) is the ability to actually maintain a relationship with the client. They want the certainty of relationship that is really only available with an adviser who has a direct relationship not via another company.