The right price for financial advice, investment management and administration is somewhere between 1.25 and 1.4 per cent, according to financial adviser Ken Bloomfield.
While there’s no industry consensus on what constitutes a fair price for comprehensive advice, Bloomfield is adamant that sophisticated clients with between $500,000 and $1 million under advice should pay no more than 1.4 per cent all up.
For the majority of advisers who still depend on expensive managed funds and platforms, this is a difficult concept. However, there’s a simple way to survive the squeeze, Bloomfield says.
His Sydney-based practice Financial Clarity, which specialises in self-managed superannuation funds, has utilised managed discretionary accounts since 1989.
Today, the firm has 110 clients and $125 million in funds under advice and management which are invested in direct shares, direct fixed interest, exchange traded funds and a limited number of international managed funds via managed accounts.
The average client pays around 1 per cent for strategic advice and investment management plus 0.25 per cent for administration. Transaction fees and underlying managed fund fees add another 0.15 to 0.2 per cent.
Portfolios are tailored according to clients’ individual needs, objectives and tax situation, yet investment decisions can be executed en masse without the need to produce a Record of Advice for each change to the portfolio. This empowers Financial Clarity to react quickly when circumstances change and implement changes across the client base in one day if necessary.
But this wasn’t always the case. Bloomfield’s penchant for managed accounts started in 1989, when a wealthy client appointed him as his financial adviser on the proviso that he wasn’t sold managed funds.
The client insisted on a diversified portfolio of direct shares, which pushed Bloomfield to look into managed accounts. It was an uncommon structure then that people knew little about, referred to in those days as individually managed accounts.
In the late 1990s, Bloomfield was licensed by MLC’s Apogee dealer. He supported MLC’s MasterKey Custom platform but had a discretionary trading authority from MLC and dabbled in managed accounts on the side. This became a larger part of his business as he gained referrals from clients.
In 2005 MLC revoked his trading authority due to the introduction of the Financial Services Reform Act. Two years later, the Australian Securities and Investments Commission introduced even tougher rules around the provision of MDAs to retail investors.
By 2006, it had become almost impossible to run an efficient business.
The practice had to send every client a Statement of Advice for each change to the portfolio. It would take a week for 80 per cent of clients to respond and authorise a change. The remaining 20 per cent would take a further three weeks to chase up with a couple of outliers missing out on timely opportunities altogether.
When Bloomfield decided to leave MLC and gain his own AFSL, he restructured the business, sold a chunk of his clientbase and ended up with 65 select clients. In 2008, he launched a new MDA solution and began transitioning clients to the MDA.
The practice established formal principles and processes around the management of money. This included the creation of a five-man investment committee, consisting of Bloomfield, fixed interest manager Doyle Mallett, McGregor Asset Consulting director Rob McGregor, Longview Economics’ chief market strategist Chris Watling and global equities manager Nitesh Patel.
According to Bloomfield, the group’s core model portfolio has consistently delivered top quartile returns over rolling three-year periods.
Over the past few years, as an increasing number of clients have approached or entered retirement, Financial Clarity’s investment committee has lowered the level of volatility in the portfolios and adjusted return expectations.
Bloomfield says clients are increasingly focused on preserving capital and achieving their financial objectives, not beating a benchmark.