Value for money reigns supreme for advisers and moving clients out of underperforming high-cost products isn’t just a phenomenon in Australia, Vanguard Australia head of financial adviser services Rachel White has told the latest Professional Planner Shape of Advice podcast.
“The focus on value for money is paramount for advisers and for underlying investors and making sure that they’re getting value for money,” White said.
“Typically, that is by making sure that what they’re paying is leading to the right level of performance and when people have gone through experiences of being in high-cost products and that has led to underperformance, people’s eyes have opened and have educated themselves and we’re really seeing that wave.
“That’s not just in Australia, we’re seeing that in the UK and in the US – a huge shift towards low cost in investing.”
White said there’s been more than enough research to conclude that paying more in fees is ultimately taking away from performance.
“Low costs investments, whether that’s index or active over the medium to long term, has led to greater levels of performance,” White said.
“It’s just a bit of a foreign concept for some and it takes a bit of time to actually see the data go through experience to actually understand that but we’ve definitely come on a big journey and flows now are absolutely going into lower cost [investments] and we’re seeing the cost across the board whether that’s active or index coming down for the better of investors and that’s a win for everyone.”
Family Wealth Advisory founder and financial adviser Michael Bova said that if a cost-conscience client comes and they’re looking for a cost-effective solution, an index solution is likely the best option.
“They’re going to track the market and then just it’s important for us to match them in the right portfolio that matches their tolerance for volatility,” Bova said.
“If a client comes in and they’re more like ‘I want to get really risk-adjusted returns’ and then you can be a little bit more nuanced about portfolio construction and you can overlay it with some active [investments].”
An example of these active investments would be private market allocations, which is common for wholesale or sophisticated clients.
“You’re not trying to get expensive beta, like active managers who hug the index,” Bova said.
“That really doesn’t achieve a lot for us in portfolio management but actually getting a distinction between listed and non-listed and getting a private market illiquidity premium in a portfolio, that makes sense.”
But merely relying on simple and passive investments isn’t an acceptable investment solution if it doesn’t go through the same rigorous governance process as any other strategy.
Aequitas Investment Partners joint chief investment officer Rowan Stewart a “good” investment is simply one that does the job as intended.
“So, the first thing is to work out what job you want the investment to do in the portfolio,” Stewart said.
“Most of the time, your index investment is providing a core exposure to a particular market where there’s a recognised benchmark and you’re happy to allocate there.”
“It’s that low-cost core, and then satellite investments is when you want to target value or growth, maybe there are certain segments like small caps or emerging markets where you want active exposure there.”
Whether end investors care about the minutiae of portfolio construction rather than the outcome of the end strategy is another matter.
“Many of us in my firm have got an institutional background, but we’ve worked in financial services for a long time,” Stewart said.
“It was a bit of awakening for me, coming out of that insto background going ‘gee, advisers add a little more value than we add in insto land’, but I’ve met hundreds possibly 1000s of end investors at seminars and lunches and things like that. I’d say probably fewer than 10 have talked to me about tracking error or market relative performance.
“They’re interested in how much money they make and how much risk they’re taking. I think we often in industry lose sight of that and start thinking about stuff which is not actually relevant to the end investor.”
