Pressure from the Hayne royal commission and the Financial Adviser Standards and Ethics Authority is eroding the confidence of advisers, says Dan Miles, who notes that advisers he encounters are increasingly seeking lower-cost alternatives to traditional managed fund products that may not be in their clients’ best interests.
Miles, who is managing director and co-CIO at Innova Asset Management, a research and consulting firm focused on the retail advice market, says advisers are “massively lacking in confidence” as a result of public perceptions that they aren’t educated enough and conduct themselves in an unprofessional manner.
The result, he says, is that planners are relying on cheap products to demonstrate their adherence to best-interests duty.
“The current environment, with the [Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry] and FASEA, is definitely contributing to the lack of confidence,” Miles says. “A bunch of the bigger guys have been beaten over the head for charging exorbitant fees and advisers have extrapolated that they have to offer the lowest cost possible in portfolios.”
Miles says products with lower fees are often poor choices for clients and can put them in a worse position than products with higher fees, which can be more appropriate if the client’s risk profile matches.
“At the moment, advisers are thinking that if they don’t shave five or six basis points, they can’t recommend a change from one product to another, even if that product is more appropriate,” he explains. “Satisfying best interests is about setting the client up with the most appropriate portfolio, not the cheapest product. I always bring it back to risk; allocating the appropriate amount of risk in a portfolio, according to the goals a client has set, is far more important than saving them 15 or 20 basis points per annum.”
He uses the example of an accumulator client looking for investment advice for their superannuation.
“If you wanted to allocate them to the cheapest option available, that would be cash, but they’re going to have a crappy retirement,” Miles says. “However, if you allocate them to something riskier, even if it’s just a 20-basis-point ASX 200 ETF, it’s more expensive but more appropriate.”
Lack of belief
Miles says a number of factors are contributing to the erosion of adviser confidence. FASEA and the royal commission have called into question the qualifications, methods and intentions of advisers, but there are other factors as well.
“It’s not the advisers’ fault,” Miles says. “There’s been this massive wave of pressure coming from the regulators and from the media as well.”
He says the key to advisers retaining their mojo will be licensees, whose role it is to provide them with the tools they need to explain their value. Knowing their value will give them the confidence to make better judgement calls on appropriate products that cost more.
“I don’t think advisers are doing anything sinister here, they just lack tools in the toolkit,” Miles says.
