Financial advisers will in future have to pay more attention to the cost of financial products, particularly investments, they recommend to you, the annual convention of the Financial Planning Institute (FPI) heard this week.
When the proposed Treating Customers Fairly (TCF) legislation is introduced, advisers will have to take much greater account of the costs of any products they recommend to you because costs degrade returns and many costs are not transparent and not fully disclosed, Phil Billingham, an expert in the TCF legislation that was implemented in the UK, says.
Billingham also says financial advisers are underpaid, and product providers will have to give up some of the costs they earn to ensure that advisers, as the ones who take all the risk, are properly remunerated.
Gerhardt Meyer, a member of the international Financial Planning Standards Board Regulatory Advisory Panel and the head of strategy at acsis, says under the proposed TCF legislation, advisers will have to consider whether it is fair to charge fees based on your assets under management rather than have set fees for a service or for the hours of work involved.
Anne Cabot-Alletzhauser, head of the Alexander Forbes Research Institute, says if you are investing for the long term, costs do matter.
Candice Paine, the head of retail at Sanlam Investment Management, says it is now possible to bring down the costs of investment by using smart beta products. These investments do not slavishly track an index based on the weighting of shares in the market, but rather reconstruct indices so that they deliver returns that are uncorrelated with the market and suffer less of the obvious pitfalls of the market-cap-weighted indices.
Gavin Wood, the chief investment officer of Kagiso Asset Management, says that to beat inflation you must be exposed to equities, and while the average fund manager does not outperform its benchmark after fees, there are a number of fund managers that consistently outperform their benchmarks. These managers, he says, are typically those who invest by making use of the valuations of shares or other assets.
The valuation of a share is its price relative to its expected earnings.
Wood says fund managers who consistently provide good performance above the benchmark and in excess of their fees are those who buy and hold shares when prices are low and who sell or avoid shares when their valuations are high.
Wood says a good financial planner should allow your fund manager to do this and not get fearful or let you get fearful and leave the market when it is performing badly. This is the time a valuation-based fund manager with conviction needs to be buying shares, he says.
Wood says many exchange traded funds that track indices based on market capitalisation do exactly the opposite of a valuation-based fund manager and buy into shares when the prices are high and sell when they are low.
This is because a share’s price affects its market capitalisation and hence its weighting in an index based on market capitalisation.
Passive investments that track indices based on the market capitalisation of shares or other securities can therefore be dangerous, he says.
Wood also says that the days of high fixed fees for asset management are over because the low-inflation environment in which returns will be lower will expose these high fees.
Well-structured performance fees are a way to ensure a fund manager is rewarded only for out-performing a benchmark, Wood says.
Warren Ingram, an independent financial planner and the 2011 Financial Planner of the Year, says he has negotiated with product providers to get investments for his clients at very low fees, ranging from 0.5 percent to 0.75 percent a year.
He charges professional fees for his services that amount to more than the product providers earn, he says, but these fees are transparent and are deducted from clients’ investments on a monthly basis.
Ingram says his fees are based on the work involved in servicing you and are capped and not based on assets under management.