Following on from last week’s blog on the Storm Financial debacle I thought this week we could take a look at an issue that irks me and fellow independent traders and investors – the issue of the fee’s charged by fund managers and financial planners. As many of you are well aware these fee based industries make their money by earning a fee off the back of your investment.
So you walk in the door to talk to “Let me take care of you Financial Advice group” believing that they are professionals and must know more about managing money than you do, because that is their business and yours is medicine or engineering or plumbing, whatever the case may be. Unfortunately this may not always be the case. Despite the supposed need to be licensed and have done an appropriate course or courses in product and client knowledge, the majority of these advisers are driven to generate fees to earn an income. And who can blame them for that. They are spending time handling compliance paperwork and have to become familiar with heaps of different investment products to promote. This is time consuming work so they deserve to earn a crust. However, here comes the problem. It is only natural that, despite all the claims that they are working in the best interests of the client, they have a vested interest in encouraging you to invest your money in the products that generate the highest possible or most consistent fees for them. In the majority of cases they will receive an introducing fee and a trailing fee or even an ongoing portion of the management fees.
The upshot is, that at the end of the day these guys get paid regardless of whether your investment goes up or down. Their supposed ‘duty of care’ last’s about as long as it takes for them to get the first commission cheque, then you are just another number in a pool of commissions and fees that they receive from their stable of fund providers. In a roaring bull market when everyone is making money, times are good, and everyone’s happy, these fees and charges can be easily glossed over as the glassy eyed investor is shown fantastic returns (even though the returns underperform the market in 90% of cases) and a myriad of tables and charts ‘proving’ to them how markets always go up and investments in the share market always increase in value over the long term, despite the occasional glitch.
The problem bubbles to the surface though when markets tank, investments depreciate in value, dividend streams are reduced, and investment growth is negated. Despite this though, the fund managers and investment advisers are still clawing money out of your account in the form of management fees, performance bonuses and other charges. Through their mismanagement of your money, you have lost a considerable portion of your investment, retirement fund, nest egg, or whatever else you like to call it. Yet these guys still dip into your funds on a regular basis to extract their management fees which could also be based on “FuM” (Funds under Management) for money invested via the financial planner even if the FuM are in cash.
As GES noted in his comment on last week’s Blog: “93% of financial advisers are purely and simply salesmen armed with an instruction manual on how to close a sale.” In other words they learn how to close sales not how to manage risk, time the market or spread their clients’ capital across the market appropriately. This is supposedly the fund managers’ job or the investment manager’s job.
Well if that’s the case why is there even a need for financial planners if their role is to look after the performance of their clients investments but they don’t because the fund managers do that? The answer is that there is NO need for them if that is their role. The issue is that this is their perceived role by investors whereas their actual role within the industry is really as a distribution network for investment products, i.e. sales people.
This is a major problem with the whole financial advice industry and only adds further voice to my ongoing belief that everyone can, and perhaps must, learn to manage their own financial situations. It is a skill that everyone can learn with the correct tools and education– provided they are guided along the path and have the desire and commitment to take control of their finances.
A story doing the rounds on the internet at the moment is quoting some startling numbers regarding bonuses paid to the staff of a major US fund manager and investment bank. This organisation lost more than $27 billion last year, and was ‘bailed out’ by the US government. Despite this massive loss and the use of tax payer money to rescue this organisation of thieves and crooks, staff received bonuses totalling in excess of $4 Billion!
Whilst no such massive events have occurred in Australia, there are still those who have been awarded bonus payments and performance fees whilst their funds performance has been negative. This has got to stop. The regulators have to take the lead and eradicate this nonsense from the industry. The financial planning industry blossomed in the 1990’s as the regulators saw the industry as the answer to client compliance issues. Storm Financial and many other cases show that it is not. It is simply a “middleman” industry that massively increases cost and doesn’t achieve what it was intended to do while lining the pockets of commission based financial planners with easy money.
Making the industry fee-based ONLY based on time spent with clients and actual time spent on managing their investments would go a long way to solving the problem. This would require a major change to the status quo and a complete reset of the industry. If this was possible I have no doubt that itwould see a massive outflux of financial planners from the industry leaving the real McCoy’s behind that do know risk management, money management and how to time the market. They would be expensive but when market conditions come along like we have had over the last 18 months their clients would appreciate their skills.
In the mean time, I encourage you to become an active and responsible investor and do what it takes to educate yourself, or in other words, do what it takes to become your own financial planner and fund manager. Who knows, one day you might even be able to pay yourself a performance bonus – one that actually relates to performance rather than simply the generation of sales revenue and commissions.