Views Article – Sharenet Wealth

Advice, asset management and fees: An awkward discussion

Fee charges in financial services is a sensitive issue for many investors and rightfully so. It can become quite an uncomfortable discussion, especially when performance is absent. This has been the case in the local market, with underperforming equity and property asset classes over the last 5 years. In this article, I try to separate the two functions on a basic level and determine what is fair and equitable for the business relationship between the client, asset manager and financial advisor to make sense.

The asset management function

The asset management function is extremely complex, from top-down to bottom-up approaches, value, growth or GARP (growth at a reasonable price) strategies. Quantitative or qualitative models. Do they make use of algorithms or derivatives to try and create alpha (returns above the benchmark)? These are merely a few elements at play when selecting the asset manager. Their teams consist of analysts, economists, strategists, mathematicians and accountants to name a few. These people are usually extremely well qualified and don’t come cheap, they get paid as a percentage of assets under management/administration through a fixed fee per annum structure, performance fees or both. Asset management fees can range anywhere from 0.5% to 2.5%, depending on the type of fund they run.

Asset managers, however good they may be, can, in most cases, only deliver performance that the asset class/sector/industry/geographical region or general economic conditions allows them to. Local equity managers would have found it difficult to deliver 15% plus in a year where the ALSI delivered a dismal -1%. Unless they took significant risk by making big calls away from their benchmarks or used hedged positions, which might not fall within every investor’s risk appetite.

What is important to remember is that this isn’t the only asset class that was available. Offshore equities and local bonds for example, have been performing extremely well over this time, the questions are, were you advised to be there?

The advice function

It shows one how important it is to have sound financial advice, and that your advisor should always have their pulse on the market. Even though they don’t necessarily have to be the market expert, the client pays for asset management separately in most cases – this is the job of the asset manager. The problem comes in when you are still paying someone an ongoing fee for placing you in “flavour of the week” unit trust and there is no subsequent reassessment of whether this is still the right place to be.

With older generation products, especially in the form of retirement products such as RAs and endowments, the financial advice industry operated in an unregulated and a bit of a “free-for-all” environment. Ever heard of the ex-rugby player/farmer/priest who ended up selling financial products and “advice?” Products were sold with incredible fee structures that made it impossible for clients to achieve proper performance from their investments.

Having made the move from the asset management to the advice function, I have been appalled by some of the fee structures advisors charge and subsequent penalties for exiting these investments with no liquidity and “lock-in periods.” Coupled with some poor (local) market performance over the last while, this has equated to irrecoverable losses for many clients and most likely created permanent damage to their retirement positions.

It is important to understand that advisors should not be selling promises of performance, more often than not, this is not within their control. Risk management and charging a fair fee, on the other hand, is.

Even though one of the advisor’s most important tasks is to get the client’s asset allocation correct according to the specific client’s needs, objectives, circumstances which will determine investor’s willingness and ability to take risk. Asset allocation and the responsibility to constantly monitor whether investors are still where they should be is quite a small portion (however important) of quality advice. Advice also includes large portions of tax, risk and estate planning, as well as budgeting and cash flow management. Not only for individuals, but when complicated trust and company structures get involved, an intricate knowledge of all these factors and how they relate to one another comes to the fore.

The understanding of foreign exchange control, different tax regimes in different countries and the risks involved with investing offshore has been a major trend for some time now.

Advisors should also inherently understand the client’s risk profile and be in-the-know of any needs and circumstance that might warrant a change in the client’s investments. This is done by having a close, professional relationship with the client and regular reviews. Experienced advisors understand that every situation is different and there are many factors at play in various situations.

So now that we have separated the functions of asset management and advice above, let’s turn our attention to financial advisors. There are two important questions I feel clients should ask themselves when selecting financial advisors:

  1. What experience and qualifications should my advisor have in order to best cater for my needs?
  2. How much would I be willing to pay this professional, to ensure that the ensuing business relationship makes sense for both parties?

Experience and qualifications

With the formation of FAIS (Financial advisory and intermediary services act) and the FSCA, professionalism has returned to the advice industry to some degree. We are almost gone with the days where those who cannot manage their own finances are advising others how to manage theirs. It is difficult to state exactly what qualifications a quality advisor should have, but be on the look-out for at least the following:

CA, CFA, MBA, economics/investment/financial management post grad degree, post grad tax diplomas.  Your advisor should have a CFP qualification at the very least.

The fee discussion

Deciphering fees can be an intimidating task, as there are so many layers. Layers created by platforms, exchanges, advisors, asset managers, discretionary fund managers, custodians and so many other intermediaries. Every single one of these parties need to get paid from the clients’ hard-earned savings and these fees get passed on directly to clients as a percentage of the assets under management/administration, and of course, can become a substantial portion of performance, especially in a challenging market environment.

It is the duty of the advisor to ensure that the client is paying fair and equitable charges in relation to all of the above. It is up to them to negotiate the best possible fee for the client.

The question is, if I consider all of the above functions that a quality advisor needs to be an expert in, as well as the qualifications and years of study; what would you be willing to pay such a person? For the number of hours spent on meetings, proposals, reviews, reporting and general queries, what would the cost of this time be for other professionals such as doctors, lawyers and architects?

There are many platforms and newly formed asset managers out there who claim to have the lowest fees. But are you getting everything discussed above? Or is it merely a conduit to accumulate assets at relatively low margins and not doing much “managing” subsequently?

I would think the correct answer here is balance. Clients should not be paying more than a 2% annualised fee including VAT for all the above. With the revelation of digital platforms, direct market traded instruments such as ETFs and other developments, this is completely possible for clients to get a lot more bang for their buck.

Independence and objectivity

Advisors who are tied agents (representing a specific financial institution) and pushing clients onto the platform and products of a specific asset manager can hamper performance. Independence and objectivity are important, this is why independent financial advisors who have multiple platforms and asset managers at their disposal could be beneficial to clients and the resultant performance after fees.

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Martin Strauss

Martin joined Sharenet Wealth in June 2018 to lead our Investment Strategy Group. Prior to this, Martin was a Portfolio Manager at Standard Bank Stock Broking heading up offshore investment strategy. He was previously Head of Trading at PSG Wealth and has more than 7 years' experience in the investment management industry. Martin holds a B.Com Honours degree in Accounting, is a qualified Chartered Financial Analyst, holds the CFP designation and is a member of the Investment Analyst Society of SA. Martin is a director of the Sharenet Johannesburg branch.