(L-R) Steven Tang and Toby Potter

The disclosure of managed account performance fees can be “very confronting” for clients, but advisers can articulate the nuance and complexities.

“A client may come in and say, ‘well, those fees are quite high’,” Zenith Investment Partners head of consulting Steven Tang tells Professional Planner.

“But [the fees] are based on a five-year historical average, and [clients may not have to pay them] right now. It’s very hard to explain to a client that that’s the case, because they’re not as financially literate as an adviser.”

Tang explains that other products will also typically go through periods of low-performance but still report high-performance fees, making the total fees look higher to clients.

“It needs to be remembered that performance is typically reported after fees,” he says. “Any historical performance also considers higher fees [due to] out-performance.”

IMAP chair Toby Potter says managed account fees are “relatively complex”.

“There are quite a number of functions that separate our client from the underlying investment,” he says.

The rules and instructions for disclosing fees are set by ASIC’s Regulatory Guide 97. They aim to help advisers explain fees to consumers in simple terms and subsequently assist them in making informed choices.

“Historically, advisers would have probably disclosed an investment management fee for products,” Tang says.

“For products that have done well historically [such as managed accounts], the disclosure of all fees can be meaningful; however, [the total amount may not be the amount] the client will pay, but an indication what they may pay if out-performance continues.”

Tang says RG97 is not perfect, “but any solution would likely require an explanation and compel an adviser to have a conversation with their clients”.

“As long as an adviser is armed with sufficient knowledge to have an informed discussion, it’s better than non-uniform disclosure.”

He adds that Zenith supports initiatives that enable consumers to make more informed decisions.

“RG97 is an attempt to do this, but it understandably increases the compliance burden on product issuers,” he says.

“There’s no escaping this, but if all product issuers are subject to the same burden, then it’s a level playing field.”

Tang explains that fees have always been a consideration for individuals when investing, particularly given the vocal presence of index providers and industry funds in recent years.

“However, the increased transparency/disclosure of fees created by RG97, is likely discouraging individuals from using any managed accounts with higher disclosed fees, particularly where performance fees are part of these,” he says, adding that after-fee returns are what individuals care about.

“What is not well understood (unless advised) is that RG97 may overstate what an investor will pay going forward.”

The increased disclosure of managed account fees has “most likely” added a layer of complexity to advisers’ lives due to the client conversations that arise from the disclosure and increased focus on fees, according to Tang.

“However, a universal disclosure regime makes it easier for an advisor to compare all fees fairly across products, which is a positive,” he says.

“This way they can have a more informed discussion with their clients.”

Potter does not think ASIC considered all the use cases of fees when introducing RG97.

“The legal advice we received [also stated] it wasn’t absolutely clear,” he says, adding that he is unsure if there is a perfect way to disclose fees.

“Different organisations use different legal structures to provide these services. For example, some managed accounts are provided as an adjunct to the advice service, some are provided as discrete products. So, direct comparability is relatively difficult.”

Interest surges after lull

Managed account growth slowed in 2022 despite years of expansion.

Potter attributed the lull to the challenged regulatory environment for advice, but interest in managed accounts has since grown.

Tang believes this is mainly because the benefits of managed accounts are now more widely understood.

“A couple of years have gone by and people have had the opportunity to test [managed accounts] and see whether or not those [benefits] are true,” he says.

“People [now have a better understanding of] the benefits, as well as the efficiency and compliance benefits for advisers. Referrals are probably a good way to get people to do things. If you have colleagues and people that have done it before you, and you’ve heard good things, and you’re willing to take that step yourself – that’s what’s really spurring the interest.”

Tang does not believe customised portfolios are “necessarily” the future of managed accounts; however, he admits they are the preferred choice over other types of portfolios.

“There’s certainly [many reasons] why [people] want to launch a customised managed account,” he says.

“That comes down to knowing your client base, knowing what they want.”

Tang adds that 85 per cent of Zenith’s business consists of customised portfolios built to match various investment objectives, including those driven by responsible investment principles.

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