Funds management industry needs cheaper options

Fidelity finance and Australians overall wellbeing
January 30, 2020
Charging fairly for advice
February 12, 2020

MEDIA RELEASE:The funds management industry has failed investors for too long with limited transparency and no alignment of interests, according to Bellmont Securities director, Peter Bell.

Mr Bell believes the fees charged by managed funds to advisers and their clients are a practical example of the alignment between the two parties being too opaque.

“Australian equity funds traditionally charge management fees of around one per cent, however it is still possible for a manager to run an equity portfolio at significantly less than this and turn in a performance that sits at the top of its peers.

“Net returns after the deduction of all fees and taxes are the only returns that matter to investors,” Mr Bell says. 

He says that despite some improvements in recent years, too many fund managers continue to be paid fat fees to essentially track an index, only to underperform.

“The lack of transparency within managed funds means that it’s almost impossible for investors to detect, with limited disclosure of the fund’s holdings or transactions which is an issue the industry needs to better address,” he says. 

As an example, Bellmont’s Australian Equities model portfolio would have ranked second out of approximately 500 comparable funds on the Morningstar database over the last year, and ninth out of 480 funds over two years, but unlike other portfolios in its category, it charges a base management fee of only 0.385 per cent – less than half that charged by its top 10 peers.

Mr Bell says another advantage of model portfolios for investors is the potential tax implications.

“Despite their dominance of the investment landscape, unitised investment structures are inefficient from a tax perspective. A better approach is to ensure that advised investors retain full beneficial ownership of their shares. Historically, this has been very costly and cumbersome for advisers, but that is where the next generation of investment platforms really come in,” he says.

The Bellmont Securities model portfolios are currently available to the broader advice market on the adviser platform alternative, WealthO2.

WealthO2 managing director, Shannon Bernasconi, says these types of low cost, unconflicted operating models  are typical for the class of adviser firms she engages..

“WealthO2 supports advisers by providing a cost-effective means of managing and administering both listed and unlisted investments, as well as hosting specialists in investment management who can provide models, research and investment committee participation,” she says.

Ms Bernasconi says the benefits of model portfolios operating on WealthO2 go beyond just the transparency of client’s holdings and transactions, and are a good example of naked pricing in action.

Naked pricing simply refers to the idea that the fee for each service in the advice value chain is transparent, not bundled with other elements, nor cross-subsidised by third parties which leads to inevitable conflicts of interest and hidden fee layers. 

“Bellmont, for instance, charges a model investment management fee and a performance fee only if it performs. WealthO2 charges a fee for service, but there are no fees on cash, no shelf space fees for the model (like SMA fees), and none of the other conflicted payments you often see,” she says.

Ms Bernsaconi believes the move towards naked pricing is resulting in fundamental change in the industry, with a move away from vertically integrated product distribution models.

“Fortunately we’re now seeing products and services being selected on the basis of merit. This provides a strong tailwind for top performing boutiques, advisers and their clients,” she says.