JD de Lange, the chief operating officer at contrarian funds manager Allan Gray, says there’s an extra layer of costs worn by investors that will remain until there’s cultural change – change beyond what’s likely to be recommended in the Hayne royal commission’s final report.
De Lange says he’s investigated these costs as part of a process he began in earnest more than two years to measure and attribute a basis-point value to every charge for additional services outside of fees charged for advice and investment management.
Ascribing value to fees might seem like a simple enough task to those outside the industry, but anyone who has worked in wealth management knows that tracing the origins of fees is far from an easy task, de Lange says.
His investigation of the large and opaque world of retail administration fees has been a process – at times verging on a professional obsession – which has led to the investment firm developing an online tool to help users calculate admin fees they are paying based on a range of investment scenarios. The admin fee calculator sits at the front end of a funds marketplace Allan Gray has developed which gives investors and advisers alike access to more than 70 funds.
The new Allan Gray investment platform is not solely an attempt by the investment firm to provide a low-cost alternative to other investment platforms in the market, de Lange emphasises.
“The biggest thing we want to change is not the price people pay but the principles the system is based on,” he says, in conversation with Professional Planner.
“Everyone I’ve talked to about this, many of whom are either sophisticated investors or advisers who have been around a while – they’re all paying more in fees for administration than they think they’re paying,” he says.
So, de Lange’s mission is to bring the industry’s and end-investors’ attention to the costs hidden in plain sight under the guise of administration fees.
Opening Pandora’s Box
Administration fees incorporate insurance administration fees and administration fees relating to product transactions and account keeping, but also include the extra – in some cases 1 per cent or more – that platforms charge on necessary cash holdings above the cash rate, trustee fees and in the superannuation environment, fund membership fees, de Lange says.
Professional Planner highlighted the different amounts the various platforms charged for cash holdings in a recent analysis of BT Panorama’s fees.
“If I want to have an elevated discussion with someone who wants to invest in managed funds, I’d say the two things that add most value are their choice of adviser and their choice of investment management. The admin is the drag. It gives you online access, it sends you four statements a year, there’s not really much additional value beyond that. It should be done the cheapest, most effective way possible,” de Lange says.
Despite his relegation of the role of administration, de Lange says he believes admin providers continue to occupy too prominent a role in the wealth management value chain.
“The value proposition for administration has not changed in 30 years. You can buy multiple investment options and you get reporting. But this thing in the middle in the last 30 years has taken over the relationship – platforms own the relationship, with adviser on the one side and charge the investment manager fees to be on the platforms on the other. But of all the services, platforms add the least value,” he says.
Pay to play, alive and well
De Lange points out that Allan Gray, which manages more than $5.5 billion locally, pays a substantial amount in any given year to funds researchers and platforms to make its funds available to retail investors. De Lange notes Allan Gray’s funds, like any others in the market, need at least three independent funds ratings and must be on at least six investment platforms to be in a position to attract meaningful retail flows.
“That’s a cost before we even get an investor into the door,” de Lange says, noting “pay for play” is alive and well.
These types of arrangements were called out by the Future of Financial Advice (FoFA) reform, which banned shelf-space fees in arrangements after July 2013. Caveats to the ban on volume-based shelf space fees are highlighted in ASIC’s Regulatory Guide 246, ‘Conflicted and other banned remuneration’.
Calling out pay to play – now firmly part of the wholesale and retail industry’s parlance – is part of the cultural change de Lange says Allan Gray is attempting to get in front of with its new fee calculator. Allan Gray won’t be charging managers fees to be on its menu.
“Funds should cost the same regardless of the ownership or compliance situation of the adviser’s network,” de Lange says. Some funds can cost more or be more difficult to access depending on what approved product list an adviser is using and which group they’re licensed to, he highlights.
“Our view is advisers and investors should have equal access to funds and for equal cost,” he says.
De Lange dismisses the suggestion that providing access to a menu of investment managers will create an awkward competitive tension between Allan Gray and platform providers that also offer the firm’s funds.
“There’s currently not one platform out there that doesn’t have its own funds as well… more competitive tension in the market has to be a good thing,” he says.