Last week BT Financial Group announced a managed portfolio component to its Panorama operating system resulting in some interesting commentary.
The main benefit highlighted was that managed account structures provide efficiencies to advisers around some aspects of administration. It would provide advisers a simple way to access shares, managed funds and cash through a range of managed portfolios, and remove the need for financial planners to individually monitor or trade assets.
Some industry commentators even went so far as to suggest the launch indicates “the time is over for financial planners as quasi-investment managers”.
As an independent financial planner, I argue this is self-serving and proves the total disconnect between fund managers and fiduciary duty. In light of recent industry scandals, it is not the time for financial planners to abandon investment management. On the contrary, it is time for them to take control of their client interest to achieve their goals. That is what is expected of us and what we are paid to achieve.
History has proven that fund managers and managed fund structures have failed to produce above average returns. In fact, they have failed miserably to protect investors’ interests.
Fund managers are reliant on research support to be included on advisory firm approved product lists (APLs). They must demonstrate a robust mandate upon which to operate. To be judged on this mandate is determined by the research house. The issue is that this mandate will not have any reference to investors’ funds and objectives; it will about philosophy, theory, management credentials and investment parameters, with maybe some backward looking theoretical performance data. In the event the market declines, the manager remains tied to the mandate. The result of this, as seen numerous times before, is the demise of fund managers following major market movements.
It is only the financial planners that have a primary relationship with the client and the individual client’s best interest in mind, who can effectively design and manage investment portfolios. By this, I am referring to investment portfolios that are based specifically on client outcomes, which have the flexibility to restructure as required to protect the client’s best interest, and consistently achieve the client’s desired outcomes. These are concepts that are completely alien to the fund management sector.
Managed funds, or unitised investment structures, were introduced for individuals who do not have sufficient funds to obtain sufficient diversification in direct markets or who prefer a passive approach to investment.
Financial planners require managed funds that are simple in structure and stripped of “shelf space fees” and other non-investment related costs to be borne by the consumer. If a client needs ASX exposure, listed investment companies (LICs); including AFIC, Argo and Milton Corporation, provide low cost alternatives with long term track records of consistent performance in both capital growth and dividend income.
Investment structure is important. Unitised products are simply not suitable for many clients, particularly in respect to retirement income streams. A large number of Australian consumers have been devastated by not only the GFC market downturn, but the failure of managed funds to protect their best interests. Investors have seen their capital shrink dramatically. To add insult to injury, some unfortunate investors have also incurred capital gains tax obligations as a result of the manager being forced to sell assets to satisfy withdrawals.
From the perspective of an independent adviser, at times of market correction, advisers need to work their hardest to re-balance client portfolios and re-align to client objectives. They need to counsel their clients and ensure that they take the right action to take advantage of opportunities and protect their long term interests.
It is not the time to run and hide because fund managers have failed to do the job – they never will.
