Yes, no, and it depends.
Yes, if the fees or commissions are reasonable in relation to the value of the services they provide.
No, if the adviser (and let’s include the firm they work for here) is just ‘clipping the ticket’ – whether the ‘clip’ is taken as commission or fees. Particularly so where conflicts of interest exist (as when an adviser claims to be, or gives the impression of being independent when this is not really the case).
With regulation now imposing professional standards on those who give investment advice, fees and commissions for these services should fairly reflect the value of the service, which is why … it depends. Regulation hasn’t been the only force for change. Standards of reasonableness in financial adviser remuneration have been gradually changing for decades, but without regulation the sort of change that was required would have taken decades more – if ever fully arrived.
Historically the vast majority of so-called ‘investment advisers’ and ‘financial planners’ were little more than salesmen. Worse, really. Unlike insurance agents, whose relationship with product providers was usually out in the open, investment ‘advisers’ tended to disguise the fact that their clients were often the victims of a parasitic relationship between their ‘advisers’ and fund managers.
Sadly, what goes on in many practices still falls well short of a professional standard. Let’s look at a couple of examples.
Case 1
Adviser takes 1.0 percent of portfolio value per year for ‘looking after’ clients’ investments. But the adviser has little if anything to do with the investments. These are in one or more diversified funds, or a master fund. A fund manager or managers look after the portfolio – with total fund costs of 2.5 percent or more per year. In return for their remuneration, the adviser:
- Uses a tool provided by a fund manager or an external provider to select a risk profile;
- Has occasional client meetings;
- Responds to phone and emails from the client, and
- Acts as a conduit between client and fund manager – collecting address and bank account changes (and money) for the fund manager, and passing on investment reviews, tax summaries, newsletters and other material to clients – all or most of which is also provided by the fund managers.
Is the adviser’s remuneration reasonable? No (and nor is the fund manager’s – but that’s for another day). Of course we should also consider how well the adviser does the rest of the job: knowing the client, knowing the products – and adding wisdom and skill. It could be, for example, that they persuade a client to stick with a sound investment strategy through a tough period – saving them from a loss that covers their fees for several years.
I call this sort of adviser a ‘fund agent. Perhaps fund agents could charge for one-off value-adds like the one I’ve just described. But any ongoing portfolio linked remuneration should be no more than 0.25 percent per year. And, ironically, this was the pretty much standard rate at which investment ‘trail commissions’ was paid to advisers when I joined the industry in 1990. Now, as one of the worst abuses that persist in New Zealand, trail commission at a crippling 1.0 percent of portfolio value is still common – and for what? Little more than directing client cash to certain funds.
Case 2
Adviser takes 1.5 percent (fees only) of ongoing portfolio value (for the first $100k, scaling down to 0.5 percent for any portion over $1m) per year to provide a comprehensive financial planning service that includes portfolio construction. Services are provided to a relatively small number (under 100) of client households. The adviser takes no commission for investments, and has a lot of involvement with the investments. These are in mix of listed and wholesale securities (saving the client 1 to 2 percent a year in fund costs). Asset allocation targets and an approved list of securities are managed in house, in a disciplined process that involves consultation with a group of experienced peers and robust, external, independent research. In return for their fees, this adviser does all the things listed for Case 1 above, and also:
- Provides financial management, insurance, savings, retirement adequacy and income planning, estate and tax advice, referring to and working with external professionals, and integrating all of this as appropriate with the investment advice;
- Builds and proactively manages an investment portfolio, taking advantage of opportunities as these arise, and so that the portfolio continues to reflect the ongoing asset allocation and security selection research;
- Undertakes accumulation and drawdown planning, relating this to portfolio construction and risk profile considerations, and
- Is in frequent touch with clients (aided their relatively small number) explaining and commenting on events and market developments.
Is this adviser’s remuneration reasonable? Almost certainly. While their fees may look high as a percentage of investment value, their services go well beyond these investments. Rather than simply funnelling client money to fund managers, they are advocates for their clients with fund managers.
The days when clients needed advisers to access to markets are gone. The Information Age means anyone with a few clues, some time, and a broadband connection has all the access they need. The old bureaucratic model, with its forms and queues to ration data, has passed. But people still have financial needs and goals. Financial planning may not be rocket science, but it does require judgement, patience and discipline. Today’s clients have less time than ever to do these things for themselves.
A good financial adviser can add real value and command good fees – but investors should make sure that whatever they pay their advisers (and fund managers) they are getting real value in return.
Disclosure: Simon Hassan is a practicing financial planner, a Director and Senior Client Adviser at Hassan & Associates, based in Auckland, New Zealand. His Disclosure Statement is freely available on request and may be downloaded from his website at www.hassan.co.nz.